While the phrase ‘cash is king’ holds true, even in today’s increasingly cashless society, credit can be just as important. Credit lines are a powerful tool that provide businesses with access to a sum of available cash for a deferred fee.
A credit line can act as a lifeline for a business that is temporarily struggling with cash flow, or a useful backup option in case an unexpected expense suddenly appears.
However, using credit does come with risks. If you fail to stay on top of credit repayments, you can quickly find yourself in a tricky place, with repayments mounting and interest increasing the amount you owe each month.
In this article we’ll explain how credit lines work in detail. We’ll explain what you as a business, or a consumer, have to do to access a line of credit, as well as what benefits they offer, and what you should bear in mind when applying for credit.
Credit line definition
Let’s start off with the definition. It’s important to make a distinction between credit and debt, as they’re often confused with one another. While both concepts are related, they’re different in one important way.
Where debt, which usually comes in the form of a loan, is acquired as a lump sum, credit is provided as a reserve of cash that can be accessed and used as and when required. This has important implications for the amount of interest you pay on each of these different types of borrowed money.
When it comes to loans, a business will be lent the entire loan amount at once, and start paying interest on that amount immediately.
With a credit line, on the other hand, a business will be given access to a specific amount of credit. However, they only pay credit on the money that they use from that credit line, and can access more once the balance that they owe has been paid off.
Different types of credit line
Although some types of credit line are account based, they are usually accessed via a credit card. As a result, you’ll also face a variety of additional credit card fees depending on how you use your card to pay.
There are actually a few different types of credit line, each of which has different benefits for businesses in different circumstances:
- Non-revolving credit line
Once you have used the total balance of a non-revolving credit line, the credit line is over. In general, non-revolving credit lines tend to be larger than revolving credit lines.
- Revolving credit line
Revolving credit lines also come with a set credit limits. However, any balance that you repay will immediately become available again. In this sense the credit line is continuous because you can access funds repeatedly until the end of the agreed credit period.
- Secured credit line
A secured credit line offers lower interest rates in return for some form of collateral for the credit provider.
- Unsecured credit line
An unsecured credit line does not require collateral to open, but you will receive higher interest rates as a result.
The benefits of using a credit line as a business
Having access to a line of credit brings a lot of potential benefits to businesses:
1. Increased liquidity
The amount of money or cash reserves that businesses hold at any one time varies hugely from company to company. Certain industries suffer from highly irregular peak seasons, which makes cash hard to come by at certain times of the year. Having access to a credit line can provide much needed liquidity at times when other sources of cash have dried up.
2. Quick, accessible cash flow
Credit is also much easier to access, especially when using a credit card. Rather than using a debit card that links directly to the main company account, employees can use a company credit card, which the business will pay off at a later date (usually the end of the month).
3. Building a credit score
Using a line of credit, and repaying the balance in good time, also allows businesses to improve their credit score. This, in turn allows them to access credit at better rates.
How to access a credit line
To access credit as a business, you have to go through a similar process as individual customers do when applying for a credit card. Much like individuals, businesses submit an application for a line of credit to a credit provider, who will then check the business’s eligibility against a few different factors:
- Credit score. Businesses need to meet a minimum credit score requirement to be granted a credit line. Credit score is a calculated using five different factors – payment history, amount owed, length of credit history, new credit and credit mix. Together these factors help lenders assess how likely a business is to make repayments.
- Revenue/turnover. Creditors may also want to see your business’s revenue and turnover figures to assess how much money your business brings in to pay off credit.
- Age. The age of your company is also important as it’s an indication of how mature your business model and processes are.
Generally, business credit rates are better than consumer rates. This is because businesses have more financial backing and more legal obligations towards suppliers and creditors, etc.
Moss corporate credit cards
With Moss corporate credit cards, you can give each and every employee or department their own card. They can use their Moss card via Apple Pay and Google Pay to buy team drinks, office supplies or any other employee expense that you offer in your expense policy. You can even set up cards specifically for monthly recurring marketing expenses, or one-off cards for high value purchases.
Moss allows businesses to simplify their corporate spend with a variety of powerful spend management solutions. Get better spend visibility, free your accounting teams from tedious, time consuming tasks, and save money across multiple different departments with more efficient money management.
It’s possible to give each Moss card its own custom budget limit and track it directly via the Moss app. You can even set up notifications to warn you when a specific card is reaching its spend limit, and alter the limit on the go if you need. Moss corporate credit cards come with up to £2.5 million credit per month and attractive repayment terms to match your business requirements.
Where a line of credit is usually a one-time pot of credit that is available to use, a revolving credit line is a pot of credit whose outstanding balance can be reused once paid off.
Being able to access a line of credit when needed can be a vital lifeline for smaller businesses in particular. In emergency situation, being able to pay with a credit card can be the difference between survival and bankruptcy, so it’s always advisable to consider having a line of credit as a back up option if your business is unable to pay for certain things in the short term.
However, at the same time, credit does come with significant risks if you fail to stay on top of charges. Interest will compound over time if you do not meet your minimum repayments, meaning you’ll end up owing much more than you borrowed. If your company was already struggling with a lack of cash, this can easily lead to severe financial troubles.
The amount of money you’ll be granted on a credit line all depends on your business’s creditworthiness. Just like individuals, companies also have their own credit score, which credit providers use to assess how quickly you pay back credit. The higher your credit score, the more attractive rates you’ll be offered by providers, hence why it’s always best to pay back any money you owe in full as quickly as possible.
They key distinctions that can be made for credit lines are:
Where revolving credit lines are replenished when used credit is paid back, non-revolving credit lines finish once the set credit limit is reached.
Secured credit lines require collateral in return for better interest rates, whereas non-secured credit lines come with higher interest rates but don’t require collateral.