Quick answer
A business line of credit is a revolving facility with an approved limit that you draw on when needed and repay when cash comes in. You generally pay interest only on the amount drawn, plus any facility or line fees. It suits recurring cash flow gaps rather than one-off purchases, and can be unsecured for trading businesses or secured against property for larger limits.
Key points
- You draw and repay as often as you like up to an approved limit.
- Interest usually applies only to what you have drawn, but line fees can apply to the full limit.
- Best for recurring gaps such as stock cycles, wages before invoices land or BAS quarters.
- Limits are usually reviewed regularly, and lenders can reduce them.
At a glance
- Structure
- Revolving limit you draw and repay
- Typical use
- Recurring short-term cash flow gaps
- Security
- Unsecured for many trading businesses; property-secured for larger limits
- Costs
- Interest on balance drawn, plus possible establishment and line fees
Our review: business line of credit at a glance
What works well
- Pay for the money only while you are using it
- Funds available again as soon as you repay
- Smooths seasonal or lumpy cash flow
- One approval covers many future draws
What to watch
- Line or facility fees can apply even when nothing is drawn
- Easy to slide into permanent use rather than short-term bridging
- Limits can be reviewed down if trading weakens
- Not designed for long-term investments such as equipment
Usually suits
- Businesses with predictable, recurring gaps between paying out and getting paid
- Owners who want a safety buffer for unexpected costs
- Seasonal businesses stocking up ahead of a busy period
Probably look elsewhere if
- You need money for a single, long-term purchase
- The balance is unlikely to be repaid regularly
- Fees on an unused limit would outweigh the benefit
A term loan answers the question “how do I pay for this?”. A line of credit answers a different one: “how do I get through the weeks when money goes out before it comes in?”. That distinction is the whole review in a sentence. Used for the right job, a line of credit is one of the most efficient tools in business finance. Used for the wrong one, it quietly becomes expensive permanent debt.
How a business line of credit works
The lender approves a limit. You draw from it when you need to, either into your transaction account or directly to pay a bill, and repay whenever cash arrives. Each repayment frees that part of the limit to be drawn again. Some facilities require a minimum monthly repayment; others only require interest to be serviced, with the balance repaid by a review date.
Most facilities charge interest on the daily balance drawn. On top of that, many charge an establishment fee and an ongoing line or facility fee on the full limit, whether or not it is used. That is the cost of having the money on standby.
What makes a line of credit a good fit
Lines of credit shine where the gap is recurring and self-correcting: it opens, then closes when customers pay. Common examples:
- a wholesaler paying suppliers on delivery and collecting from retailers 45 days later;
- a builder covering materials and wages between progress claims;
- a retailer stocking up for the Christmas trade;
- any business smoothing the quarter when BAS, PAYG withholding and super fall due together.
Map your own pattern with the cash flow gap calculator. If the balance dips and recovers, the lowest point plus a buffer is a sensible starting size for a limit.
Where it goes wrong
The most common misuse is drawing on a line for something that will not pay it back quickly: a vehicle, a fit-out, an owner’s personal expense, or simply covering losses. The balance stops revolving, the limit sits fully drawn, and the business is paying ongoing interest and fees on what has become an expensive term loan with no end date. If that is happening, it is worth looking at working capital loans or debt consolidation instead.
The second risk is that limits are not permanent. Lenders review facilities and can reduce or cancel them if trading weakens or a covenant is breached, often at the time the business most needs them. Treat the limit as a convenience, not a guaranteed safety net.
Line of credit versus the alternatives
| Need | Often the better fit |
|---|---|
| Recurring short gap that closes on its own | Line of credit or overdraft |
| Customers paying invoices on long terms | Invoice finance |
| One-off purchase with a clear payback | Unsecured term loan |
| Vehicle or equipment | Equipment finance |
What to look for in an offer
- All the fees: establishment, line or facility fee, any minimum usage charge and fees on early closure.
- How interest is calculated: daily on the drawn balance is typical; check the billing cycle.
- Repayment rules: minimum repayments, clean-up periods and the review or expiry date.
- Security and guarantees: unsecured lines usually need a director’s guarantee; secured lines may involve property.
- Review triggers: what lets the lender reduce or cancel the limit.
Our guide to using a line of credit well covers habits that keep a facility working for you.
Is a line of credit right for your business?
If your cash flow follows a predictable rhythm and the gaps close on their own, a line of credit is often the most cost-effective way to cover them, because you only pay interest on what you use. If you would like to explore a limit sized to your business, you can make one enquiry. There is no credit check when you first enquire, a real person reads it and your details go to one lending partner rather than many. Include your typical monthly turnover and how long the gaps last; accurate answers lead to a sensible limit. Not sure whether a line or a term loan suits better? Ask in your enquiry and someone will talk it through.
Frequently asked questions
Line of credit or overdraft: which is which?
You can reuse either one. An overdraft works inside your everyday account, letting it run into negative. A line of credit is normally its own account that you transfer money out of when you need it. Fees, limits and assessment differ by lender.
Do I pay interest on the whole limit?
Usually interest is charged only on the amount drawn. However, many facilities also charge a line fee or facility fee calculated on the full limit, so an unused line still costs something. Check both in the offer.
Can a new business get a line of credit?
It is harder. Lenders generally want to see a trading history in bank statements to set a limit. Newer businesses may need security, a smaller limit or a different product to start with.
How is a line of credit limit set?
For unsecured lines, mainly from turnover, consistency of deposits, existing debts and credit history. For secured lines, the value of the security and the loan-to-value ratio also matter.
Sources and further reading
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