You’re an SME owner who needs fund for your business and are weighing out different external financing options. The right kind of financing needs to offer flexibility - you’re looking at an option that can fund a variety of expenses, and which you can tap into time and time again. If this checks off all the boxes on your list, a credit line may be right up your alley.
Below, we’ve written a comprehensive guide to a business line of credit for SME owners, with key takeaways such as:
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.
A credit line can be a good fit for your business if the following requirements apply:
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:
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.
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.
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.
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.
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.
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:
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.”
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.
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.
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:
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.