Business line of credit, explained

Most businesses don’t need a big sum once; they need a smaller sum repeatedly. Wages land before customers pay. Stock has to be bought before the busy season. A line of credit is built for exactly that pattern. This entry explains how it behaves, what it costs to hold and how lenders set the limit.

How does a business line of credit work?

The lender approves a limit — say, enough to cover your usual shortfall in a slow month. You then:

1. Draw funds into your business account when you need them.
2. Repay when money comes in, either by minimum repayments or by clearing the balance.
3. Draw again — the repaid amount is available once more, up to the limit.

Interest is charged on the drawn balance, not the whole limit. Some facilities also charge a line fee on the limit itself. Because the facility is usually separate from your transaction account, many owners find it easier to see exactly how much they’re borrowing than with an overdraft.

What kinds of lines of credit are there?

Type	How the limit is set	Typical use
Unsecured line of credit	Turnover and bank statements, with a director’s guarantee	Everyday cash flow for trading businesses
Property-secured line of credit	Equity in residential or commercial property	Larger or longer-running needs
Receivables-based facility	Value of unpaid invoices	Businesses with business customers — see invoice finance
Trade line	Supplier invoices and shipping documents	Importers — see trade finance

Unsecured, cash-flow and line-of-credit options for trading businesses typically range from $5,000 to $500,000. Property security can support larger limits.

When is a line of credit the right tool?

A line of credit shines when the need is recurring and self-liquidating — you borrow to bridge a gap, and the gap closes on its own as money arrives. Good fits include:

• seasonal businesses stocking up before a peak;
• trades and services waiting on progress payments;
• businesses covering payroll, BAS or super during a slow month;
• keeping a standby buffer for opportunities or surprises.

It’s a poor fit for long-term purchases. Using a revolving limit to buy a vehicle or fit out premises ties up the facility for years; equipment finance or a term loan usually works better. If you’d like to test your cash cycle against a line of credit, you can talk it through with a specialist.

What does a line of credit cost to hold?

Beyond interest on what you draw, look for:

• establishment fee — to set up the facility;
• line or facility fee — charged on the limit, often monthly or annually;
• drawdown fees — some lenders charge per draw;
• annual review fee — for the periodic review of the limit;
• dishonour or overlimit fees — if repayments bounce or the limit is exceeded.

A facility with no line fee but higher pricing on drawn funds can be cheaper for occasional users; one with a line fee may suit businesses that stay drawn most of the time. Loan fees explained covers each fee type.

How do lenders decide the limit?

For unsecured lines, the lender reads your statements to understand typical monthly turnover, the size and timing of your dips, and what you already owe. It then sets a limit it believes the business can use and clear within a normal cycle. Signs of a healthy facility are regular repayments and a balance that returns towards zero, rather than one that sits at the limit permanently.

For secured lines, the property’s value and the loan-to-value ratio do most of the work.

Line of credit, overdraft or term loan?

These three are often confused. The short version: an overdraft sits inside your transaction account, a line of credit sits beside it, and a term loan is a single lump sum. Our overdraft vs line of credit comparison and short vs long-term loans go deeper.

How can you use a line of credit well?

A line of credit rewards discipline. A few habits keep it working for the business rather than against it:

• Draw for a reason. Tie each draw to a specific gap — a supplier bill, a payroll run, a BAS payment — and know when the money will come back.
• Watch the low point. A healthy facility regularly returns towards zero. If the balance hasn’t dropped in months, part of it may belong in a term loan.
• Keep headroom. Using the whole limit every month leaves nothing for genuine surprises.
• Reconcile monthly. Check interest and fees against your statements so there are no surprises at review.

Worked example (illustrative)

Illustrative only. A garden-supplies wholesaler does most of its sales from September to December but has to pay suppliers from July. Each year it borrows to stock up, then repays from spring sales.

A line of credit sized to its peak stock purchase lets it draw progressively through winter and clear the balance by January. Across the year it pays interest only on the drawn balance, and the limit is there again the following July. A lump-sum loan would have meant paying interest on funds sitting idle for half the year.

Could a line of credit smooth your cash flow?

If your business has a cash cycle that dips and recovers, a line of credit may be the most efficient way to carry it. The enquiry takes about a minute and there’s no credit check when you first enquire. We won’t circulate your details to a stack of lenders — a real person looks at your trading pattern and calls you. Please describe your turnover and the size of your usual shortfall accurately so we can size the right limit first time.

See if you qualify →