11 Jan The basics of getting a business line of credit
Many businesses experience gaps within their cash flow, due to seasonal demand variations or unexpected expenditure. A business line of credit is a popular option for closing gaps in working capital. Here we look at what getting a business line of credit entails, and how it differs from both Pay4’s revolving credit facility and from a traditional business loan.
What is a business line of credit?
A business line of credit is essentially a revolving loan that gives your business access to a fixed amount of money. It can be used as and when required for day-to-day costs, and capital requirements. The entire amount does not need to be used all at once, and when each amount is paid back, it can be used again. In this sense it is similar to the Pay4 product.
When a business line of credit is opened, businesses receive instant access to a prearranged amount of funds. This again is similar to the Pay4 facility.
A business line of credit stays open to use as needed over a fixed period of time. Usually the credit must be fully repaid within 6 to 12 months and the line of credit is then closed. This is different to the Pay4 product which does not have an end date. Once the Pay4 facility is opened, it is there for you to include as part of your cash flow cycle throughout the year. Many businesses incorporate Pay4 as part of a flexible long term working capital strategy.
Where are they available from?
Business lines of credit are available from both banks and alternative finance providers, however, most banks prefer to offer an asset finance line of credit or an overdraft. With both of these they would be taking security, over the assets in asset finance or debenture over the business for an overdraft. The UK Government also runs a scheme to support UK exporters of capital goods.
The advantages of a business line of credit
Many providers now offer online application for business lines of credit. This means less time is wasted, allowing you to concentrate on running your business. And you won’t miss potential opportunities due to lengthy or time-consuming application processes, forms and meetings. Less documentation is required, and indicative approvals can be conducted within as little as a few hours.
A business line of credit is essentially a deposit of cash into your business’s account of any amount up to your agreed limit, as and when required. Once the cash is in your account, it can be used for any purpose. This makes a business line of credit entirely flexible, with the amount of debt 100% tailored to your needs.
Because you decide how much to use of your available line of credit as any given time, and you only take what you need, as you need it, a business line of credit is a more controllable form of debt than a business loan.
The disadvantages of a business line of credit
A business line of credit tends to be an expensive option since it usually is used to cover an unexpected shortfall in working capital or cash flow. Some providers will also require the facility to be secured by assets or by a Personal Guarantee from the business owner. Pay4’s credit facility requires no such personal guarantees and is unsecured so not backed by assets.
A business line of credit also has a limited life span, often dictated by the terms of the line of credit, or indeed the relatively high costs of keeping a line open and in use.
How does a business line of credit compare to a loan?
An amortising loan is the most common form of traditional loan, and is generally arranged for a fixed amount, for a fixed time, with a prearranged repayment schedule. (There are loans that can be variable, however it depends on the interest rates provided). The ongoing, ‘dip in, dip out’ nature of a business line of credit provides more inherent flexibility.
Compared to a ‘bullet repayment’ style loan, which is taken out ‘in whole’ at the beginning of the term with interest charged on the entire amount outstanding, and is due back in full at its end, business owners are required to return only the amount of a line of credit that is actually spent. Any interest charges are calculated upon the actual total used within the line of credit.
Business loans in general are a more common option for longer-term investments. Term loans are more suitable for paying for longer-term assets that will be used over many years. Lines of credit are particularly useful for short-term, operating costs and for more immediate revenue-generating opportunities. This is because the business owner can access funds as needed.
There are also typically fewer restrictions on how the funds borrowed under a line of credit are used. For example, mortgages must go towards the purchase of the property in question, and an auto loan towards the specified car. A line of credit can be used at the discretion of the borrower, from supplier payments to asset purchase.
A business line of credit does have some advantages over a traditional business loan. However they are usually intended to cover a short term shortfall in cash flow and as such tend to have high interest rates. They also often charge each time the facility is used and have initial set up costs too.
How Pay4’s revolving credit facility compares
The Pay4 facility has many advantages over a business line of credit. There are no set up costs, there is no interest due, and you only pay a fee for when the facility is used. This makes Pay4’s facility extremely cost-effective, and a more growth-enabling option for businesses.
Like a business line of credit, you can use the Pay4 facility as and when you want and you don’t have to draw down the full amount. You can also use the Pay4 facility to cover short term gaps in your cash flow if an unexpected and large expenditure is needed. However, because the Pay4 facility has no end date, it is meant to be used for your long term financial planning.
Pay4’s facility is also ideally configured for supply chain optimisation: to get early payment discounts, or to significantly increase the amount of stock you order at one time, thereby making significant savings on delivery charges for instance.
Presenting a smarter option than a standard business line of credit, Pay4 does not charge non-utilisation fees. We only charge a straightforward transaction fee as and when you choose to use the facility. You select a fixed date when you want to repay Pay4 up to 120 days later. Pay4’s facility is created specifically so you can keep using it as part of a progressive, cost-effective and growth-focused cash flow strategy.
Should I apply for a business line of credit or Pay4’s facility?
With the availability of alternative finance now greater than ever, it’s important to understand which option is most suitable for your business.
Many businesses experience gaps within their cash flow, due to seasonal demand variations, unexpected expenditure, or opportunities for growth. A revolving business line of credit is a popular and flexible option for closing gaps in working capital for businesses with short-term cash flow requirements.
Pay4’s simple, flexible revolving credit facility operates similar to a business line of credit, yet with added flexibility and cost-effectiveness. Our credit limits, which range from £50,000 can be used, repaid and reused as often as your cash flow cycle requires. All the advantages of a business line of credit: efficiency, flexibility, and control, are also an integral part of the Pay4 facility. Yet Pay4 has much more to offer businesses focused on both short-term opportunity and long-term success. The flexibility that the Pay4 facility has allows a growing business to incorporate it into a sustainable financial strategy.