When someone describes themselves as ‘being in debt’, it’s often considered a negative. They might have overspent on their credit card or are possibly struggling financially. But for small business owners, the debt that comes from taking out a small business loan or a line of credit facility can, in the right circumstances, be a step to growth.
Used wisely, access to credit through a business loan or a line of credit can help boost cash flow and profit.
I often hear of business owners using their personal credit card to boost cash flow or make business-related purchases, but you might be surprised to know there are more cost-effective ways to manage your business expenses.
Here I’ll outline the different types of small business credit, which loan structures might suit different circumstances, and why access to credit can be an effective tool for business.
While there is nothing wrong with using a personal credit for small, everyday expenses, such as buying morning tea or basic office supplies – for the convenience of the payment method – a traditional business loan or line of credit will usually be the better option for larger purchases and to manage cash flow.
Small business loans suit large, one-off expenses such as getting a $10k – $20k website or marketing campaign off the ground.
The debt on a business loan is paid across a fixed repayment term, with the possibility of early repayments reducing the total cost of the loan.
By contrast, a line of credit is an ongoing credit facility that provides cash flow when it’s needed across a set term, and you pay interest only on the funds you use. Lines of credit are typically utilised by my small business clients that rely on stock turnover.
With a line of credit, you can borrow the money when you need it, you only pay the interest when the loan is outstanding, and when the money comes in through sales of that stock, you can pay it off and leave it running in the background.
If you need to spend money straight away and you know what you’re spending it on, then a business loan is usually the better option. Your finance broker will be in the best position to provide you with a comparison of loan options from a range of lenders, including costs and repayments.
A line of credit will more generally work for business owners with smaller ongoing needs or to purchase immediate stock and supplies.
If you’re looking to get a credit facility set up for potential future expenses, or you’re not completely sure where the money’s going to go but you would like a safety net, a line of credit would be an option. It doesn’t cost you anything until you use it, but you can continue to draw down as needed.
Your finance broker will help you to weigh up what the debt will cost versus the outcomes for the business from using that money.
It’s worth noting that while getting a loan in the first place might impact your immediate cash flow (if using a small business loan), there may be tax implications and advantages to using borrowed funds which may decrease the real costs. At the end of the day, you’re using someone else’s money to maximise your ability to make your own.
Your finance broker can also work with your accountant to review better options specific to your business case and goals.
In the meantime, here are two key questions business owners should ask themselves before committing to taking out a loan or a line of credit:
It’s interesting just how much new technology, refreshed office fit-outs or even upgraded machinery or vehicles can boost both output and bottom line.
I work with business owners from a variety of industries every day to find and improve business funding arrangements. If you are looking at ways to boost your cash flow or it’s simply time to expand or upgrade equipment, touch base today and together we can review your finance options. Give me a call on 0402 023 693 or click on the button below to request a call back at a time that suits you.
Published: 15/8/23
THE FINEPRINT: The information provided on this site is on the understanding that it is for illustrative and discussion purposes only. While all care and attention are taken in its preparation any party seeking to rely on its content or otherwise should make their own enquiries and research to ensure its relevance to your specific personal and business requirements and circumstances.
Green Finance Group Pty Ltd ACN 145 035 221 is authorised under LMG Broker Services Pty Ltd ACN 632 405 504 Australian Credit Licence 517192.
I’m an ex-banker and have been working independently as a finance broker for over a decade. My career experience in banking and finance is extensive and includes all aspects of home, personal and small business lending.
Cairns
With access to over 60 lenders and hundreds of home loan products I can provide you with the choice you need to negotiate a better deal on your home, investment, or business loans. Currently assisting clients based in Edge Hill, Edmonton, Bayview, Earlville, Cairns City and surrounding suburbs.
"I’ve been helping local Cairns families and borrowers to get a better deal on their home, investment, car and personal loans for over 20 years. I know exactly what it takes to make the process as hassle-free as possible.”
