Business line of credit: a limit you draw, repay and draw again

A business line of credit is the closest thing in finance to a safety valve. Instead of borrowing a fixed sum and repaying it on a schedule, you’re approved for a limit. You draw on it when cash is tight, pay it back when money comes in, and draw again next time, without filling in a new application. You generally pay interest only on what you’ve actually used.

That flexibility is why so many owners want one, and also why it’s easy to use badly. This page covers how a line works, how the limit is set, what it costs and where it fits against the alternatives.

How does a business line of credit work?

The business.gov.au glossary of key financial terms describes a line of credit as an agreement that lets a borrower withdraw money up to an approved limit. In day-to-day use it looks like this:

1. You’re approved for a limit, say $100k.
2. You draw what you need. $30k this week to pay a supplier, transferred into your business account.
3. Interest runs on the $30k, not the full $100k.
4. You repay when customer payments arrive. Some facilities require minimum monthly repayments; others ask for interest only, with the balance cleared periodically.
5. The repaid amount becomes available again.

Lines can be unsecured, with the limit set on banked turnover and account conduct and typically between $5k and $500k, or secured over residential or commercial property, where equity sets the ceiling and higher limits are possible. Not sure which way your situation leans? The secured or unsecured check is a quick start.

Who is a line of credit best suited to?

A line of credit earns its keep when cash gaps repeat or are hard to predict:

• Businesses with lumpy receivables. Contractors and agencies whose clients pay at different times each month.
• Seasonal businesses. Tourism, retail and agriculture, which spend before the season and earn during it.
• Online sellers. Stock orders, ad spend and platform payouts rarely line up. The ecommerce business loan page shows how lenders read marketplace income.
• Businesses that want a buffer. Some owners keep an undrawn line purely as insurance against a bad month.

It’s a weaker fit for a single, defined purchase. A one-off need with a clear payback is often better as a short-term business loan, and long-life assets belong in equipment finance.

If your gaps come and go, you can see whether a line of credit suits your business in about a minute.

Line of credit, overdraft or loan: which one?

The business.gov.au funding guide lists business loans, overdrafts and lines of credit side by side among the debt products banks offer. They overlap, but they aren’t interchangeable.

	Line of credit	Business overdraft	Business loan
How you get the money	Draw from a facility into your account	Your transaction account goes below zero	Lump sum up front
Reuse	Yes, as you repay	Yes, as deposits come in	No; reapply for more
You pay on	Drawn balance, plus any fees	Overdrawn balance, plus any fees	Full amount from day one
Repayment	Minimums or periodic clean-up	Deposits reduce the balance automatically	Fixed schedule
Best for	Recurring, uneven gaps	Day-to-day float	One-off, defined needs

The business overdraft page goes into the overdraft’s quirks, such as annual reviews and how deposits sweep the balance.

What does a line of credit cost?

Pricing depends on the business’s circumstances, including turnover, trading history, credit history, industry, security and the limit size. The structure usually involves some combination of:

• Interest on the drawn balance. Calculated daily on what you’ve used.
• A line or facility fee charged on the whole limit, whether drawn or not. This is the cost people forget.
• Establishment fees when the facility is set up.
• Draw or transaction fees with some providers.
• Review or renewal fees when the facility is rolled over.

To compare two offers fairly, estimate how much you’d realistically have drawn on average across a year, then add every fee to the interest on that average. A facility that looks cheap on interest can cost more if its line fee is high and you rarely draw on it.

Illustrative example

Illustrative example: A specialty food wholesaler supplies cafés and independent grocers. Its customers pay on 30-day terms, but its importers want payment on order, and order sizes swing with the seasons. Over a typical year the business needs somewhere between nothing and $120k of float, and the timing changes month to month. A single loan would either be too small in peak months or cost money sitting idle in quiet ones. A line of credit with a $150k limit lets the owner draw in the run-up to Christmas, clear it through January as invoices are paid and leave it almost untouched through winter. Interest runs only on what’s drawn, and the line fee is the price of having the buffer ready.

Common mistakes with a line of credit

• Letting it become permanent debt. If the balance never comes down, the line is funding a structural shortfall. Lenders notice “hardcore” balances at review time, and many expect the line to be cleared or substantially reduced periodically.
• Funding long-term assets. Using the line for a vehicle or fit-out leaves no room when a genuine cash gap appears.
• Ignoring the fee on unused limit. A big limit you never touch can cost more than it’s worth.
• Not forecasting. The business.gov.au guide to managing cash flow suggests keeping and updating a cash flow statement so you can plan for busy and quiet periods. It’s the best way to choose a sensible limit, rather than simply asking for the biggest number.

Want a buffer that’s there when you need it?

If your business keeps hitting the same kind of cash gap, a revolving limit is often a better long-term answer than borrowing afresh each time, and checking where you stand is quick. The enquiry takes about a minute and nothing touches your credit file at that stage. We don’t pass your details around a crowd of lenders, so there’s no flood of calls. A real person looks at how money moves through your business and calls to talk about a sensible limit. Please answer the form questions accurately, particularly turnover, existing debts and property ownership, so we can line up the right facility the first time.

See if a line of credit fits →