Does your SME require flexible short-term financing to manage its cash flow, cover an unexpected expense or increase its working capital? If so, it may be worthwhile to consider a business line of credit. This type of financing allows borrowers to draw funds as needed, up to a limit, over a short period of time. It also may save your business interest rate charges compared to a business term loan.
Table of Contents
- What is a Business Line of Credit?
- What Type of SMEs Should Consider a Business Line of Credit?
What is a Business Line of Credit?
Also known as a revolver, a business line of credit is a type of loan that allows borrowers to draw funds anytime up to an agreed upon limit and pay interest only on the amount drawn. These factors give businesses the funding necessary to cover short-term financing needs as they arise. Business lines of credit are different from business term loans that require borrowers to apply for a set loan amount and pay interest based on the entire loan principal over a structured repayment schedule.
Business lines of credit function quite similarly to personal credit cards. However, business credit cards are better used for smaller transactions that can be repaid quickly, because they tend to charge higher interest rates.
What Are the Benefits of a Business Line of Credit?
While business term loans charge interest based on the loan principal amount, business lines of credit only charge interest based on the amount presently utilised by the borrower. This saves businesses money in terms of interest rate payments, as they are only charged for the amount of financing they need at a given moment, rather than the total loan amount.
Additionally, this type of flexible financing allows businesses to repay and redraw frequently, typically without fees for early full repayment. Finally, most lines of credit are unsecured, meaning that they do not require borrowers to provide collateral.
What Are the Drawbacks of a Business Line of Credit?
Business term loans typically offer larger financing amounts than lines of credit. Additionally, business loans tend to offer lower interest rates. Therefore, businesses with lines of credit must be careful to not borrow in excess of their needs, which will result in relatively high interest rate payments.
In Singapore, traditional banks tend to be the only providers of business lines of credit. Therefore, startups and SMEs that may not meet banks' eligibility requirements, may not be able to receive business lines of credit.
What Type of SMEs Should Consider a Business Line of Credit?
Businesses that are able to meet banks' eligibility requirements and require flexible financing to manage short-term cash flow pressure, increase working capital or cover unexpected expenses should consider a business line of credit. By opting for a line of credit instead of a term loan, these businesses will be able to reduce interest rate payments by incurring interest only on the amount drawn from their line of credit. Additionally, businesses that are able to repay their loans quickly will save money with a business line of credit compared to a traditional business term loan.