Starting a business in Australia can be an expensive affair. While home businesses with minimal capital investments and variable expenses can cost as low as $400 to start, larger corporations can cost in the thousands to set-up.
You may then need to borrow additional finances to start your business. One type of borrowing many Australian businessmen and women consider is the line of credit.
What is a Line of Credit?
A line of credit is a type of financing where the lending agency allows you to borrow as much cash as you need, whenever you need it. The line of credit is granted only to individuals who have a strong credit score.
In Australia, the Equifax Score is used to calculate a borrower’s eligibility to a line of credit. Ideally, a score between 833 and 1200 is considered an excellent credit rating, but even a score between 622 and 725 is eligible for a line of credit.
Six Questions to Ask Yourself to Know if a Line of Credit is Right For You or Not:
Why do you need money?
One of the best things about a line of credit is how the lender doesn’t require a reason for the borrowing. In a loan, you have to specify how you will be using the lender’s money and when you will be repaying it; for example, business loan, auto loan, housing loan and so on.
A line of credit can be used for anything, from paying-off your education loans to making small grocery purchases for your house. You don’t even need to take the lender’s permission to make purchases using the line of credit.
How quickly do you need the money and how much do you need?
If you have a high Equifax score, you can get a line of credit approved within 1-2 days. But if your credit score is low, then it may take up to 40 days to get your line of credit approved. A secured loan is approved much faster even with a low Equifax score.
Next is the quantity. If you’re looking for a fixed amount for a definite period of time, a loan is a good option. Bank loans are granted in a lump sum at the start of the loan period and you have complete access to your funds. But once you’re through with this loan, you won’t have access to additional funds, unless you take out a new loan.
However, if you need smaller payments for an indefinite period of time, a line of credit financing is better. A line of credit is granted in smaller, staggered batches and you can take out as much credit as you want, whenever you want.
Do you have collateral to mortgage?
Both secured and unsecured lines of credit are available for borrowers. The personal line of credit, in particular, can be got completely collateral-free. If your business is already in operation and you just need some quick cash, then an unsecured personal line of credit will help you access pocket-friendly financing within a few hours.
However, if you’re an entrepreneur starting a company, then a business loan is a better solution, since a personal line of credit may give rise to legal concerns if used to start a business.
How long do you need it for?
Loans are restrictive. They have a specific start date and end date, before which the money must be repaid. On the other hand, there is no end date for a line of credit. The borrower can take credit for however long they want and pay the interest for the duration of time they take the credit.
A line of credit is perfect if you’re unsure about the expenses you may have in the future, or you foresee the need for financing multiple times.
What interest rate are you willing to foot?
Of course, with these benefits do come the disadvantages. The line of credit interest rates and processing fees are significantly higher than loan rates and processing fees. Additionally, while loan rates are fixed, the line of credit rates are variable. Defaulting on a line of credit has a much worse impact on the credit rating of borrowers than defaulting on loans.
A line of credit isn’t a great option if you’re unsure whether you can or cannot repay this money in the future.
Do you have the will power not to overspend?
This is probably the most important question to ask yourself when considering a line of credit. Given how easy it is to get a line of credit – basically on-demand financing – there is always the risk that you may be tempted to overspend. You may not even realise you’re exceeding your budget before it’s too late.
This is one of the reasons why applying for a line of credit is a risky proposition if you’re not a disciplined spender. At &Solved, our team of experts can help you find the right financing for your business. Contact us for more information.