Frequently Asked Questions
How does a line of credit compare to other business loans?
The main difference is that you start paying interest on a lump sum immediately when you take out a business loan whereas with a LOC you only pay interest on the amount of money you draw down.
How does it differ from an overdraft?
You can access funds from a line of credit whenever you need them, unlike an overdraft which can only be accessed once your account goes into the red.
How much can you borrow?
The lender will approve your credit limit based on your business finances including your gross revenue and cash flow. Credit limits and how they are calculated vary from lender to lender. For example, one lender may cap your credit limit at a percentage of your gross revenue, whereas another lender may cap it based on your cash flow.
What are the repayment terms?
Different lenders have different minimum and maximum loan terms. Here’s an example of what to expect:
Line of credit – Loan term between 3 to 30 months.
Revolving line of credit – No term, once you have paid back the amount, you can draw down again, this is why it’s called a revolving line of credit.
The line of credit will be reviewed now and then (e.g. every 3 years). It’s a lot harder to get a revolving line of credit from a bank.
What are the fees?
Some lenders charge a one-off application fee. This is usually based on the approved credit limit. For example, you may need to pay 0.50% to 3% of your approved credit limit. So, for a $50,000 limit the application fee would be anywhere from $250 to $1500 and there may be a minimum fee.
What is the interest?
As with any finance product, line of credit interest rates vary from lender to lender. Depending on your business situation, the lender will approve your credit limit and interest rate which applies each time you draw funds. You will only pay interest on the portion of funds you draw. For example, if you had a $25,000 line of credit and you withdrew $10,000, you would only be responsible for paying interest on the $10,000, not the entire $25,000. This gives you greater flexibility and should cost you less than short term business loans.
Bear in mind that you will need to keep meeting your interest payments on any amount you draw until it’s paid back, so it can get costly if you only pay the interest and not the principle. On the flip side, you wouldn’t need to pay any interest during times when you do not access any of the funds.
Are there any other fees?
Some line of credit facilities come with a monthly service fee for the privilege of having access to the funds. The monthly fee is payable whether or not you are using any of the funds. The fee varies between lenders and it’s important to understand all fees before you agree to a line of credit. It’s always best to check the comparison rate (interest rate and fees combined) when comparing lenders.