The SME Owner's Guide To A Business Line Of Credit

How does a business line of credit work?

With a business line of credit (or revolving credit), you’ll gain access to a pre-approved sum of capital. It’s similar to a credit card; you don’t need to use the full sum, but can draw from the line as and when you need. Interest is charged on the amount that is drawn, and once this sum is repaid, your credit limit goes back up. This is referred to as 'Pay per use' system in aspire.

Is a line of credit a good fit?

A credit line can be a good fit for your business if the following requirements apply:

1. You’re looking to fund short-term expenses

One of the biggest benefits that a line of credit offers is its flexibility. There are no restrictions as to how much you can draw (as long as it’s within your credit limit) and what you can use the funds for. These include:

• Financing unforeseen expenses: By opening up a line of credit in advance, small business owners can tap into the credit facility to finance unforeseen expenses that crop up - such the costs of replacing an equipment or maintenance repairs.
• Overcoming seasonal fluctuations: Evening out your cash flow across the high and lull periods is a common challenge for seasonal businesses - and here’s where a line of credit comes in. With the credit facility, you’ll be better able to meet your operational expenses despite fluctuations in your revenue.
• Covering cash flow gaps: Late payments are a significant cause of cash flow gaps for SMEs; according to the 2017 SME Financing Survey, 60 percent of SMEs face payment delays from customers. With a line of credit, you’ll be better positioned to manage cash shortfalls that arise from delayed payments. The revolving line of credit serves as a cash cushion to help you meet your operational expenses.  

Tip: Keep in mind that it’s best to avoid using up the line for long term investments. This is because it limits how much you can access when urgent expenses crop up.

2. Flexibility in your spending

A revolving line of credit provides access to a pool of funds when the need arises. As such, it’s a great financing option if you have unpredictable expenses, or are in a situation where you know you’ll need external financing in the near future, but aren’t able to determine exactly when you’ll need it or how much you require.  

3. Quick access to fund

Tapping into the credit facility is one of the quickest and most convenient ways to access working capital. The newer online lenders typically have streamlined application processes with access to funding in as soon as 24 hours.

4. Financing recurring expenses

With a credit line in place, you’ll be able to draw from your funds repeatedly, which makes it a great option for meeting recurring expenses like payroll or ongoing marketing campaigns.

Commonly asked questions about a business line of credit

What are key factors I should consider when applying for a line of credit?

Minimum requirements:

As a general rule, banks and traditional lenders typically impose stringent criteria (common requirements include having a pristine credit record, a minimum operational history of two to three years and a minimum annual revenue of $200,000). Where-else alternative lending platforms offer greater flexibility.

At Aspire, all SMEs and small business registered with ACRA are eligible for an AspireAccount. Eligibility for a credit line are as follows: PTE LTD or LLP companies with a Singaporean or PR director of at least 30 percent shareholding.

Credit limit:

Traditional lenders typically offer larger lines of credit, yet small business owners may face difficult to even qualify for bank financing solutions. If a lower and quicker credit limit suits your business better, you’ll want to consider turning to online lenders. With Aspire, you’ll be able to obtain a credit line of up to $150,000 with express approval on the same day*.

Speed of funding:

There are two factors that affect how soon you can access the credit line:

• Credit limit: Typically, smaller lines of credit are approved more easily, compared to facilities with larger credit limits.
• Type of financial institution: Banks and traditional lenders often have rigorous application and onboarding processes in place. While approval time will vary across institutions, it could take between three to six weeks before you gain access to funding. Online lenders may be a better option if you require funding urgently, as certain lenders can approve your application and provide access to funding in as soon as 24 hours.

Repayment structure:

In general, lenders offer a weekly or monthly repayment schedule. Before you apply for a credit line, it’s important that you work out a repayment structure that works for your business, so that you’re able to meet your repayments comfortably.

The key is to look at your customers, and how you’re getting paid. Credit and collections author and consultant Michelle Dunn advises: “If they are paying on time, or 15 to 30 days late, that’s going to affect how you pay back this line of credit. You don’t want it to be a struggle.”

Fees involved in credit line?

• Opening fee and annual fee: As the names suggest, an opening fee is charged when you open a credit line, while annual fees are charged on a yearly basis. These fees will vary across lenders and financial institutions; for example, a lender may only charge an opening fee for the first year (and waive off the annual fee), with the annual fee being imposed from the second year onwards. For Aspire, we do not charge any account opening fees. You'll only start paying once you start drawing out funds.
• Processing fee: Processing fees are akin to origination fees, and are deducted from the total sum that you’ve requested every time you draw from the line. Here’s an example: if you have a draw fee of one percent and you’re drawing $2,000 from the line, there will be a deduction of $20 and you’ll receive $1,980.  

• Maintenance fee: Certain lenders may require that a monthly maintenance fee be charged on unused lines.
• Terms: Depending on your lender, the loan terms for a line of credit may range from about 12 weeks, to a year or longer.

A business line of credit vs short term loan?

Business line of credit vs. short term loan

Unlike credit lines, short term loans aren’t revolving, but are lump sum loans set to be repaid within a predetermined time frame. These loans are best suited for larger, infrequent expenses.

Business line of credit vs. business credit card

Business credit cards have lower credit limits, and are typically used for day-to-day expenses such as purchasing office supplies. In comparison, a business line of credit provides access to a larger sum of working capital. As such, it’s a better option for managing cash flow gaps or operational expenses.

A line of credit also enables a business owner to access cash directly. With a credit card, you might be able to obtain a cash advance - yet it often comes with expensive fees and high interest rates.

Can a poor credit score affect my application?

Your personal credit score holds weight in your lender’s assessment of your application - particularly if you’re running a newly founded venture without an established credit history.

That’s because it’s an indicator of how you’ll manage your business finances, and gives potential lenders an idea of whether you’ll be reliable and timely in meeting your payments. Depending on your lender, your application may be rejected, or you may have difficulty obtaining a credit line that offers your desired credit limit or favourable lending terms.

Tips for getting your business line of credit application approved

Have a clear plan of action for how you’ll use your funds

Even if a business plan isn’t required for your application, there are benefits to drawing up a long term strategy, along with an action plan for how you’ll be using your credit line. This will provide lenders with a clear idea of where your venture will be six months to a year down the road, and boosts your credibility.

Keep in mind to include the following:

• Back-up plans: What will you do if your expenses exceeds your budget, or you’ve run into an unexpected sales slump? By outlining possible worst case scenarios and solutions you plan to implement, you’re demonstrating that you’re well prepared to meet your payments even under challenging situations.
• A summary of current projects and recent successes: Small business owners may face difficulty in convincing lenders about the longer term vision and potential of their companies - particularly if they’ve only just gotten their businesses up and running. Therefore, a better strategy would be to focus on your current successes: What projects are you working on at the moment? What activities have worked well, and how will you use your credit line to invest in similar strategies?  
• Multiple repayment options: It helps to prepare two to three repayment strategies, so you’ll be ready to present alternative options should your lender turn down your initial proposal.

Apply for a business line of credit well before you need it

By making your application at the right time - such as when you’re experiencing a positive cash flow - you’ll stand better chances at getting approved, as well as qualifying for more favourable terms.

You’ll need to look ahead into the upcoming six months or year to assess your capital needs. Doing so will enable you to identify periods where you may require external financing, so you’ll have ample time to make the necessary changes - such as taking steps towards building up your credit score - if needed.    

Start small, and make an upgrade to a larger line of credit over time

You might not be offered the credit limit you’re looking at right away, especially if your business financials or credit profile aren’t in a good shape. Be prepared to start off with a smaller credit line, as this can be a way for you to work towards a larger credit line. Over time, you’ll be better positioned to renegotiate for a higher credit limit when you’ve hit new milestones - such as achieving revenue growth, or demonstrating that you’re able to meet your payments on time consistently.