Business line of credit: how it works and when to use one
A business line of credit is a revolving facility with an approved limit that you draw from as needed and repay at will, paying interest only on the balance drawn. It suits recurring or unpredictable working capital needs, stock, wages, timing gaps between invoicing and payment, where a fixed term loan would be the wrong shape.
- You pay interest on what you draw, not on the approved limit.
- Best for recurring or unpredictable cashflow gaps, not one-off asset purchases.
- Watch line fees and minimum drawdowns. They change the effective cost.
- A revolving facility used and repaid consistently builds a strong repayment record.
How a line of credit works
A lender approves a limit. You draw against it when you need funds, and the money is available immediately without a fresh application. You pay interest only on the drawn balance, and when you repay, that amount becomes available again.
That last point is the difference from a term loan. A term loan gives you one lump sum and a fixed repayment schedule; the facility is finished when the loan is repaid. A line of credit is a standing arrangement you can use repeatedly for as long as it remains in place.
Line of credit vs term loan vs overdraft
| Line of credit | Term loan | Overdraft | |
|---|---|---|---|
| Access | Draw and repay repeatedly | One lump sum | Linked to trading account |
| Interest charged on | Drawn balance | Full loan amount | Overdrawn balance |
| Repayments | Flexible | Fixed schedule | Flexible |
| Best for | Recurring cashflow gaps | Defined one-off spend | Small day-to-day buffer |
| Typical limit | Moderate to large | Matched to purpose | Usually smaller |
The three suit different needs. Matching the facility to the need is most of the decision.
When a line of credit is the right choice
- You invoice on 30 to 60 day terms but pay suppliers and staff sooner.
- Your trade is seasonal and working capital needs swing through the year.
- You buy stock in cycles and want to move on supplier discounts.
- You want committed funds available for opportunities without carrying interest while idle.
It is a poor fit for a single large asset purchase. Funding a truck on a line of credit is more expensive than equipment finance, and it consumes the facility you would rather keep free for cashflow.
What it costs
Lines of credit price differently from term loans and need to be read carefully.
- Interest on the drawn balance, usually variable.
- A line fee or facility fee, sometimes charged on the whole limit whether drawn or not.
- Establishment fee at setup.
- Annual review fee, and possible revaluation cost where property secures the facility.
Work out the cost across a realistic year of usage, not at full drawdown. A facility with a low rate and a fee on the undrawn limit can cost more than a higher-rate facility with no line fee if you only draw occasionally.
How much limit to ask for
The instinct is to ask for as much as the lender will approve. A better approach is to size the limit to the working capital cycle you actually run.
Work out the gap between paying for what you sell and being paid for it. Take your average monthly cost of sales and wages, multiply by the number of months between outlay and receipt, and add a buffer for the quarter when receipts run slowest. That figure is the working limit the business needs. Anything well above it costs you line fees for capacity you do not use, and consumes serviceability you will want for other borrowing.
There is a second consideration. A facility that is permanently drawn to its limit is not a line of credit in any useful sense, it is a term loan on variable pricing. Lenders notice this at annual review, and it can affect renewal. A healthy revolving facility rises and falls through the year and returns to a low balance at least once in the cycle.
Managing a revolving facility well
- Draw for a defined purpose and note what it was, so the pattern of use is explainable at review.
- Return the balance to zero or close to it at least once a year if the cycle allows.
- Do not fund assets from it. Equipment finance is cheaper and preserves the facility for its purpose.
- Watch the fee structure as the balance changes. A line fee on the full limit makes low utilisation expensive.
- Diarise the annual review date and prepare for it. A review going into a strong quarter reads better than one going into a weak one.
- Ask about the terms of variation before you need them. Whether the lender can reduce or withdraw the limit, and on what notice, matters more than the rate in a difficult year.
The last point is the one most commonly overlooked. A revolving facility is a commitment on the lender side too, and the strength of that commitment varies. A facility that can be reduced at short notice is not the same product as one committed for a fixed period, even if the pricing looks identical.
Getting one approved
Lenders assess a revolving facility on the consistency of your trading rather than a single project. Clean bank statements over three to six months, lodged BAS, and a clear account of the working capital cycle carry the application.
BizLend is an accredited broker with a panel of more than 70 lenders and arranges business facilities from $50,000 to $5 million. We can compare secured and unsecured revolving options side by side so you can see the real cost of each.
Frequently asked questions
Is a business line of credit secured?
Both secured and unsecured lines of credit are available. Property or general security typically brings a larger limit and a lower rate; unsecured facilities are faster to arrange but priced higher.
Do I pay interest if I do not draw the funds?
You do not pay interest on undrawn funds, but many facilities charge a line or facility fee on the full limit. Check which applies.
Can I use a line of credit to pay the ATO?
Some lenders permit it and some do not. If tax obligations are the reason for the facility, raise it at application. There are lenders and products designed for it.
How is a line of credit different from a business credit card?
A line of credit generally offers a larger limit at a lower interest rate and is drawn as cash. A card is convenient for small purchases but expensive for sustained borrowing.