What is a Business Line of Credit?
A business line of credit is a flexible funding solution designed to help businesses manage their cash flow and access funds whenever they need them. Unlike a traditional business loan, where you receive a lump sum upfront, a business line of credit gives you ongoing access to a set amount of funds—your credit limit—that you can draw from as needed. You only pay interest on the amount you actually use, not the entire credit line, making it a cost-effective way to cover unexpected costs or take advantage of new opportunities.
Business lines of credit are available in both secured and unsecured forms. Secured business lines require you to put up collateral, such as property or equipment, while unsecured lines rely on your business’s credit history and financial health. For many small businesses and New Zealand businesses without significant assets, an unsecured business line of credit can be an accessible way to borrow money and keep operations running smoothly.
One of the main advantages of a business line of credit is its flexibility. You can draw funds at any time, repay what you’ve used, and access the line again as your needs change. This revolving line structure is ideal for managing seasonal cash flow fluctuations, covering short-term expenses, or investing in growth without committing to a fixed loan agreement. The interest rate is typically variable, so your interest costs may change over time, but you’ll only pay interest on your outstanding balance.
Applying for a business line of credit usually involves providing financial information, such as bank statements and tax returns, and undergoing a credit check. Lenders in New Zealand, including banks and specialist providers like Prospa, offer a range of business lines of credit to suit different needs. Whether you’re a sole trader or a growing company, you can find options with flexible repayment terms, online access to funds, and transparent fee structures.
Definition and Purpose
It’s common for a business to become cash strapped now and then. Rather than going through the formal process of securing a bank loan, find out when it makes sense to take out an unsecured line of credit
As your business grows, so do its expenses. At some point, your cash flow might not be able to keep up. When this happens, your business growth might hit a bottleneck.
To overcome their cash flow problems, business owners often look for external financing. But this can worsen the problem if they don’t have all of the facts they need to make the right choice. Compared to a small business loan, which typically provides a lump sum for long-term projects with fixed loan terms, an unsecured business line of credit offers more flexibility for ongoing expenses and working capital needs.
Out of the many financing options, an unsecured business line of credit is among the easiest and most convenient for many business owners. With an unsecured line of credit, you can access available funds as needed and only pay interest on the amount you use. Interest is only paid on the outstanding balance, not the full credit limit. However, loan terms and other factors such as your credit history and business performance can influence your approval and the conditions you receive. But that doesn’t mean it’s for everyone. These are the times when it’s logical to take out a line of credit.
1. Seasonal Cash Flow Injections
As you become more familiar with your business, you can identify cash flow or revenue patterns. For some industries, such as retail, the revenue figures will go through peaks and troughs throughout the year. Continuous marketing is essential to maintain visibility and attract customers. A business line of credit can be used to fund marketing campaigns, helping to drive growth even when cash flow is tight.
The problem arises when there’s not enough working capital to support the slumps. Not only that, but you might also need additional cash flow to prepare for the peaks. If you produce goods, you’ll need to buy more parts to support your peak order months. You may need more inventory if you’re in retail, and so on.
This is where an unsecured line of credit can be your best choice. Once approved, you get access to cash to finance your operations up to the credit limit. This is unlike a loan, where you get a lump sum which you’ll have to pay back over time.
An unsecured business line of credit is almost like a credit card account that you can charge and pay off as you wish. But in this case, the interest rate is much lower than a credit card.
2. Marketing and Advertising
A business should never stop marketing. Even when your business is well-known, there are always more potential customers in waiting. Rather than a one-time project, marketing should be a continuous effort.
Financing your marketing strategy isn’t always easy. Since it’s such an important aspect of a successful business, you may have to invest quite a bit in it. In addition, you might not see the results right away, which is why you shouldn’t spend the last of your budget when creating one.
You’re much better off funding it with an unsecured business line of credit. Save your cash on hand for the day-to-day operations of your business.
Of course, it’s always best to allocate a portion of your revenue to advertising rather than relying on external financing. But this may not always be possible. Plus, you need to spend money on marketing to make more money.
An unsecured line of credit doesn’t accrue interest if the balance is zero. You can draw some money, pay it back, and keep the line of credit around for a rainy day at no cost.
3. Human Resource Management
People will come and go as your company expands. Each time this happens, you risk disrupting your everyday operation. To fill the gap as soon and effectively as possible, you need to have a funnel.
Whenever someone new joins your company, you need to train them. Every once in a while, you need to train your current employees to make sure that they’re up-to-date with the best practices.
This means that you have to continuously invest in human resources. It’s an ongoing expense that should return more money than what you throw at it. The key is that you have access to cash to invest in recruitment and training.
For this reason, a revolving option such as an unsecured line of credit might be your best tool. You can cover recruitment, on-boarding, training, and many other expenses smoothly even when the money is tight.
This ensures a seamless flow of employees that get everything they need to ensure maximum productivity.
4. Product Line Changes
If you are branching out and adding different products or services to your business, an unsecured line of credit can be a fitting choice. This is especially true if you have a high-volume, low-dollar offer.
You never know if a new product or service will work out. As your business grows, you might have to diversify your offering. For this reason, one-time financing options, such as a loan, don’t work here.
You need to make sure that you’ll be able to make up for a potential loss and direct your money elsewhere. Balancing out your offer to ensure a steady revenue stream can be quite tough if you’re only working with what you have. The risk of cash flow disruption is too high.
By taking out an unsecured business line of credit, you know that you have some money to fall back on if your new product or service doesn’t turn out as expected. This can cushion the blow and keep the business going as usual.
How Does an Unsecured Business Line of Credit Compare to Other Financing Methods?
When it comes to managing business finances, choosing the right funding option can make all the difference. With so many choices available—like business loans, business credit cards, and unsecured business lines of credit—it’s important to understand how each one works and which might be the best fit for your specific business needs.
Business lines of credit often feature a transparent fee structure, where fees are calculated based on your outstanding balance and creditworthiness, helping you budget more effectively. Repayments for business lines of credit are typically made via direct debit from your business account, making the process automatic and convenient. If you miss a scheduled payment, you may incur a late payment fee, so it’s important to stay on top of your repayment schedule.
Interest rates on business lines of credit can be charged at a fixed rate, providing certainty for your repayment costs, or at a variable interest rate, which may fluctuate based on the lender’s benchmark rate and offer more flexibility.
Business Loan vs Credit Card vs Line of Credit
A business loan is often the first thing that comes to mind when a business needs funding. With a business loan, you receive a lump sum upfront, which you then repay over a set period, usually with a fixed interest rate. Loan terms can vary, with options such as 6, 12, 18, or 24 months, allowing you to choose a repayment structure that fits your needs. A small business loan is typically used to fund long-term projects or provide a lump sum for specific business needs, such as purchasing equipment or expanding your premises. However, business loans may not offer the flexibility some businesses need, as you’re committed to a fixed repayment process regardless of how your cash flow fluctuates.
On the other hand, a business credit card provides a revolving line of credit that’s perfect for smaller, everyday expenses. You can use it to pay for supplies, travel, or other operational costs. While business credit cards offer convenience and quick access to funds, they often come with higher interest rates and fees compared to other funding options. If you carry a balance, the interest costs can add up quickly, impacting your bottom line.
An unsecured business line of credit stands out for its flexibility and ongoing access to funds. Unlike a traditional business loan, you don’t receive a lump sum. Instead, you have a set credit limit that you can draw from as needed—similar to a revolving line. A small business line of credit is designed to provide flexible, quick access to capital for small businesses, making it ideal for managing cash flow and covering operational expenses. You only pay interest on the amount you actually use, not the entire credit line, which can help you better manage your cash flow and reduce unnecessary interest costs. There’s no need to offer collateral, making unsecured business lines accessible for many small businesses, even those without significant assets.
For New Zealand businesses, lenders like Prospa offer unsecured business lines of credit with features such as a weekly service fee, competitive interest rates, and flexible repayment terms. You can access funds anytime through an online portal, and only pay interest on your drawn balance. This makes it easier to cover unexpected costs, take advantage of new opportunities, or smooth out seasonal cash flow fluctuations with unsecured business loans.
When comparing these funding options, consider your business’s unique needs. If you need a large sum for a specific project, a business loan might be suitable. For frequent, smaller purchases, a business credit card could be convenient—just watch out for higher interest rates and late payment fees. But if you want ongoing access to funds, the ability to draw funds as needed, and to pay interest only on what you use, an unsecured business line of credit could be the most cost-effective and flexible solution.
Ultimately, the right choice depends on your business’s cash flow, credit history, and future plans. Approval and terms for any funding option will also depend on other factors such as your credit history, business performance, and relationship with the lender. By understanding the key features of business loans, business credit cards, and unsecured business lines of credit, you can make an informed decision that supports your business growth and financial health. Whether you’re a sole trader, a growing company, or an established New Zealand business, having the right funding in place can help you seize opportunities and navigate challenges with confidence.
Is an Unsecured Line of Credit for You?
An unsecured business line of credit comes with numerous benefits. This isn’t to say that it’s a one-size-fits-all solution. Before you decide to apply, you might want to make sure that it will meet your financial needs and business goals. If you do end up applying and getting approved, you won’t have to pay interest if you don’t use it.
The above outlines only some of the most common uses for a business line of credit. It’s a flexible financing option that can give you more control over your cash flow. You can use it for whenever your business has a temporary cash shortfall.
Visit our website to see how a line of credit can support your business.
