How to record a business line of credit: draws, repayments, interest and GST

Record a business line of credit as a liability. A draw increases what you owe and puts cash in your account; a principal repayment reduces the debt. Neither is income or an expense. The only costs that hit your profit are interest and business fees, and the interest carries no GST because borrowing is an input-taxed financial supply.

That’s the short version. In practice, a busy facility can generate dozens of transactions a quarter, and one wrong rule in the bank feed can quietly inflate your turnover, claim GST you aren’t entitled to, or bury the real cost of the money. Here’s how to set it up properly once, so it looks after itself.

How should draws and repayments be recorded?

Think of the line of credit as a second bank account that’s allowed to go negative. When you draw on it, money moves from that account into your operating account. When you repay, it moves back. The balance of the facility account is what you owe.

Transaction	What it really is	How to code it
Draw from the facility	Borrowed money arriving	Transfer: facility account to operating account
Principal repayment	Reducing the debt	Transfer: operating account to facility account
Interest charged	Cost of borrowing	Expense: interest, no GST
Facility or line fee	Cost of the facility	Expense: bank fees, GST only if shown and claimable
Draw used to pay a supplier directly	Borrowed money spent	Supplier payment from the facility account
Private draw	Owner’s personal use	Owner drawings or a loan to the owner, never a business expense

Most accounting software lets you set up a line of credit as its own bank or liability account and connect it to a feed. Do that, rather than letting draws arrive in your main account as unexplained deposits. Unexplained deposits are how loan money ends up coded as sales.

Does a line of credit have GST in it?

Interest doesn’t. The ATO explains that lending and borrowing money are financial supplies, which are input taxed. In plain terms, these supplies “do not have GST in their price”, and GST credits generally can’t be claimed on them.

So when you code interest, set the tax rate to whatever your software uses for input-taxed or GST-free-of-credit items, never the standard GST rate. Claiming a credit on interest is one of the most common BAS slips, and it adds up on a facility that runs all year.

Fees are where people get less certain. The ATO page doesn’t list every type of fee a lender might charge, so the safest habit is simple: look at the statement or invoice. If GST isn’t shown, don’t claim any. If it is shown on a particular fee, check with your bookkeeper before claiming.

Need a facility that’s straightforward to run through your books? Start a quick enquiry and tell us how you’d use it. There’s no credit check at that first step.

What can you actually deduct?

The ATO’s list of business operating expenses includes interest on money borrowed to produce assessable income, and bank fees and charges. For most trading businesses, that covers the interest and genuine fees on a working capital line.

Two limits apply:

• Principal isn’t deductible. You deduct the cost of borrowing, not the borrowing itself. The goods or wages the money paid for are claimed separately, as the costs they are.
• Private use breaks the deduction. If part of the balance paid private bills, that share of the interest isn’t deductible, and in a single mixed account the split lingers. Our guide to using a line of credit for private bills explains how that works.

Is an overdraft recorded differently?

Usually, yes, because an overdraft is normally your main operating account running below zero rather than a separate facility. There’s no draw to record: the account simply goes negative when you spend more than you hold.

In your books, the operating account just shows a negative balance at times. At balance date, your accountant will typically show that negative balance as a liability rather than as negative cash. Interest and fees are coded as expenses when they’re charged, with the same GST treatment as a line of credit.

The difference matters most when you have both. Keep the overdraft as your operating account and the line of credit as a separate account, so it’s always clear which facility funded what. Our pages on the business overdraft and business line of credit explain how the two facilities differ in practice.

What are the most common mistakes?

1. Draws coded as sales. This inflates turnover, can push GST onto money that isn’t a sale, and confuses anyone comparing your BAS with your bank statements.
2. Repayments coded as an expense. This understates profit and overstates deductions, and it’ll need unwinding at year end.
3. GST claimed on interest. Interest is input taxed, so there’s no credit to claim.
4. A missing facility account. Without one, the balance you owe never appears on your balance sheet, and your accountant has to rebuild it from statements.
5. No note on private draws. If a draw paid a personal bill, code it to the owner straight away rather than leaving it for June.

The ATO’s record keeping guidance is clear on the principle: accurate and complete records help you meet your tax obligations. For a line of credit, that means statements, the facility agreement and a short purpose note for each draw.

What does this look like for a real business?

Illustrative example. A small homewares wholesaler has a $150k line of credit and uses it to pay overseas suppliers before stock sells. In one quarter it draws $90k, repays $70k from customer receipts and is charged interest and a monthly line fee.

Before the clean-up, every draw arrived in the operating account and the bank rule coded it as “sales”. The BAS showed turnover far above reality, and the bookkeeper had to unpick it.

After the clean-up, the facility has its own account in the software. Draws and repayments are transfers between the two accounts. Interest is coded to “interest expense” with no GST. The line fee is coded to “bank fees”, and GST is only claimed where the lender’s statement shows it. At the end of the quarter, the facility account shows exactly what’s owed, and the BAS turnover matches the real sales ledger.

When the wholesaler later applies to increase the limit, the lender compares the financials with the bank statements and finds they agree. That’s the quiet benefit of clean coding: an assessment with fewer questions.

Why does any of this matter to a lender?

Lenders lean heavily on two sources: your bank statements and your financials. When they line up, the lender can move on to the real questions about your business. When they don’t, everything slows down.

Turnover is the big one. Unsecured and cash-flow facilities are sized on turnover and bank statements, so turnover inflated by miscoded draws doesn’t help you; it gets stripped back once the lender spots it, and it raises doubts about the rest of the numbers. Your margins also get compared with others in your industry, which our guide to ATO benchmarks and business loans explains.

Books in order? Now see what your business qualifies for

If your facility is set up cleanly, you’ve already done what most lenders wish every applicant did. Your numbers tell a consistent story, and that makes the next conversation much easier. Unsecured and cash-flow lines of credit typically run from $5k to $500k, sized on turnover and statements, and property-secured options run from $20k to $5m.

It takes about 60 seconds to enquire, and there’s no credit check when you first enquire. We don’t send your details to a pile of lenders, so you won’t be fending off calls from strangers. A real person looks at your figures and how you use credit, then calls you. Please give accurate turnover and facility details on the form so we can match the right option first time.

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