Business line of credit, explained in three steps

What is a business line of credit?

Imagine a tap rather than a bucket. A standard business loan hands you a bucket of money on day one. A line of credit installs a tap: you turn it on when you need cash, turn it off when you don’t, and the amount you can pour out is capped by an approved limit.

Business.gov.au describes a line of credit simply as a facility where “you borrow money up to a certain limit”. As you repay what you’ve drawn, that room becomes available again. You can use it, clear it, and use it again without making a fresh application each time.

That flexibility makes it one of the most useful tools for businesses whose income doesn’t arrive in neat, even instalments.

Who gets the most out of a line of credit?

Three patterns suggest a line of credit will earn its place:

1. Seasonal swings. A ski-hire shop, a pool builder or a Christmas-heavy retailer has predictable fat and lean months. Drawing in the lean months and clearing in the fat ones is exactly what a revolving facility is built for. Our page on seasonal cash flow gaps covers that in more depth.
2. Slow-paying customers. If you invoice on 30, 60 or 90-day terms, a line of credit can cover wages and suppliers while you wait.
3. Opportunistic buying. Suppliers sometimes offer a discount for bulk or early payment. A line you can draw within a day or two lets you say yes.

If your need is a single purchase, such as a truck or a fitout, a term loan or asset finance usually suits better, because you’ll repay it over a set period anyway.

How is the limit decided?

For unsecured lines, the lender looks mainly at turnover and bank statements, the same way it would for a cash flow loan. Typical unsecured limits sit between $5,000 and $500,000. For bigger limits, residential or commercial property can be used as security, and property-secured facilities can reach well beyond that.

When thinking about the limit, use three numbers:

Number	What it tells you
Your biggest realistic gap	The minimum useful limit
Your average monthly drawing	How the facility will actually be used
A quiet-month repayment	Whether you could clear the balance if needed

Pick a limit that covers the first, expect to use something closer to the second, and make sure the third is comfortable.

If you’d like help working out a sensible limit, you can ask a specialist in about a minute, with no credit check at the enquiry stage.

What does a line of credit cost?

We don’t publish rates, because every facility is priced on the business’s circumstances. What we can tell you is how the costs are usually structured, so you know what to ask:

• Interest on drawn funds. You generally pay for the money you’ve actually used, for the time you’ve used it.
• Limit or line fees. Some facilities charge for keeping the limit available, even if you don’t draw it.
• Establishment fees. Often charged once, at setup.
• Review conditions. Lines are commonly reviewed periodically, and the lender may adjust the limit based on how the business is tracking.

Ask for all four in writing before you commit. A facility that looks cheap on interest can cost more overall if the limit fees are high and you rarely draw on it.

How do I use a line of credit well?

A line of credit rewards discipline. These habits help:

• Give every drawing a job. Know what the money is for and when it will come back.
• Clear it regularly. If the balance never comes down, the line has turned into a long-term loan. That’s a sign to look at a term loan instead.
• Watch the dates. Line up drawings with known pressure points, such as BAS due dates, payroll and big supplier bills.

Illustrative example only. A boutique events company is paid deposits months ahead but final balances only after each event. During its busy spring season it draws on its line to pay casual staff and equipment hire, then clears the balance as final invoices are paid. Over a year the line is used heavily for four months and barely touched for eight, which is exactly how it should work.

Line of credit or overdraft?

They solve similar problems. An overdraft is attached to your everyday transaction account, so it’s convenient but blends borrowed money with your operating cash. A separate line of credit keeps borrowing visible and can make it easier to track. Which one suits depends on how your business banks and how disciplined you are about clearing the balance.

Who shouldn’t use a line of credit?

Lines of credit are flexible, which is exactly why they’re sometimes the wrong tool. They tend to work poorly in three situations:

• Funding a long-term asset. If you’re buying a truck or fitting out premises, you’ll be paying for it for years. A term loan or asset finance with a fixed end date is usually clearer and cheaper over time.
• Covering ongoing losses. If the business spends more than it earns most months, a line of credit just fills up and stays full. Fixing margins or costs comes first.
• Owners who find it hard to stop drawing. Easy access can become a habit. If you know that’s a risk, a fixed loan with a set repayment schedule provides helpful structure.

A good test is to imagine the balance over the next twelve months. If you can see it rising and falling, ideally touching zero now and then, a line of credit fits. If you can only see it rising, look at a working capital loan or a short term business loan instead.

Want a limit that matches your rhythm?

The best line of credit is sized to your real pattern of income and outgoings. We’d like to help you find that number.

Here’s how we work. Your enquiry takes about 60 seconds and doesn’t involve a credit check. A real person reviews it and calls you; your details aren’t scattered to a pile of lenders. Fill in the form accurately, especially monthly turnover and whether you own property, so the first conversation gets to the right limit quickly. Check your line of credit options.