The short version
- An overdraft or line of credit lets you draw money when you need it, up to a limit.
- You pay interest only on what you use, though there's often a fee for the limit.
- They suit uneven cash flow better than buying big things.
Overdraft or line of credit
Both give you a limit to draw on when you need it. An overdraft is attached to your business transaction account, while a line of credit is a separate facility. You pay interest only on what you use, but there's often a fee on the whole limit.
They suit seasonal or uneven cash flow. For a one-off purchase, a term loan is usually cheaper.
Pros
- Pay interest only on what you use.
- Draw and repay as often as you like.
- A buffer for slow months or late paying customers.
Cons
- Limit or line fees, even when you don't use it.
- Rates are often higher than term loans.
- Easy to slip into using it for the long term.
Alternatives
- Invoice finance, if customers are slow to pay. A lender advances most of what you're owed on your invoices.
- A business credit card, for smaller, short term costs you can repay within the interest free period.
- A term loan, for one off purchases you'll repay over a set time.
How to apply
Lenders want to see that the business can repay an overdraft or line of credit from its cash flow.
- Have your numbers ready. Usually two years of business tax returns and financial statements, recent BAS and business bank statements.
- Know your ABN details. Most lenders want the business to have traded for at least six to twelve months.
- Expect a director's guarantee. Many lenders ask the owners to guarantee the loan personally, even when it's secured.
- Ask about the total cost. Business loans aren't covered by the same credit laws as personal loans, so check every fee and the repayment schedule in writing.
What to compare
Business loans don't have to show a comparison rate, so add up the costs yourself: the interest rate, any establishment and ongoing fees, and what it costs to repay early.
Business lending isn't covered by the responsible lending rules that apply to personal loans and home loans, so a lender won't necessarily check the loan suits you. Work out what you can afford before you apply.