Definition
A credit limit is the maximum amount you can draw on a revolving facility such as a business line of credit, overdraft or credit card. You can borrow, repay and redraw up to that limit, and you are usually charged only on the amount used, plus any facility fees. Lenders set the limit based on turnover, cash flow, credit history and any security offered.
A credit limit sets the ceiling on a revolving facility. Used well, it gives a business a buffer; used as permanent funding, it can become expensive.
How limits are set
Lenders typically look at average monthly turnover, how steady deposits are, existing debts, credit history and any security. Secured facilities can support higher limits than unsecured ones. Ask how the limit will be reviewed and what could trigger a reduction.
Limit versus balance
Interest usually applies only to the drawn balance, but some facilities also charge fees on the full limit. Under comprehensive credit reporting, limits and repayment history can appear on your credit report, as explained by the OAIC.
Good habits
Draw for short-term needs and pay back as income arrives. If the balance never falls, a term loan may be cheaper. Our guide to using a line of credit well has practical rules.
To explore a facility sized for your business, make one enquiry.
Common questions
Do I pay for the unused part of my limit?
Some facilities charge a line or commitment fee on the whole limit, used or not. Check the fee schedule.
Can my limit be reduced?
Yes. Many contracts let the lender review and reduce limits, for example if turnover falls.
Does a high limit hurt my credit?
Lenders consider total limits as well as balances when assessing new applications, so unused limits can count against borrowing capacity.
Sources and further reading
Related terms