Business Line of Credit: Flexible Funding for Cash Flow
A business line of credit gives you access to a set limit of money that you can draw on, repay and draw on again. You only pay interest on what you use. It is designed for the ups and downs of business cash flow, not for buying long-term assets.
Used well, a line of credit can smooth out slow months, help you take on bigger jobs and give you peace of mind. Used badly, it can quietly turn into permanent debt. This guide covers both sides.
How it works
- The lender approves a limit, for example $100,000
- You draw what you need, when you need it
- Interest is charged only on the amount you have drawn
- Repay when cash comes in, and the money is available again
The Australian Government describes a line of credit as a revolving loan you can borrow from up to a pre-approved limit. Read more on business.gov.au’s guide to business loans.
Common uses
- Covering gaps while you wait for customers to pay
- Buying stock ahead of a busy season
- Paying suppliers early to get a discount
- Handling unexpected costs, such as repairs
- Meeting tax or BAS bills
- Funding materials and wages at the start of a large contract
For vehicles and equipment, asset finance is usually a better fit. For property, see commercial property loans.
Line of credit, overdraft or business loan?
- Line of credit: a revolving limit for ongoing cash flow needs
- Overdraft: similar, but linked to your business transaction account. Good for short dips below zero.
- Business loan: a lump sum repaid over a set term. Better for one-off investments, like buying another business or a major fit-out.
- Invoice finance: borrowing against unpaid invoices, useful if slow-paying customers are the main problem
Secured or unsecured?
Secured lines of credit use property, often your home or business premises, as security. They usually have higher limits and lower rates.
Unsecured options don’t need property, but limits are lower and rates are higher. Lenders lean more on your business’s trading history and bank statements.
Think carefully before using your home as security for business debt. If the business struggles, your home could be at risk. If you have a home loan, a separate business facility can also keep your personal and business debts easier to track at tax time.
What lenders look at
- How long you have been trading
- Turnover and profit, from financials or bank statements
- Your credit history and the business’s
- Any security offered
- Your existing debts
A clean credit history helps. See our Credit Ready guide for what lenders look for.
Tips for using it well
- Use it for short-term needs, not long-term purchases
- Bring the balance down regularly, so it doesn’t become permanent debt
- Watch the fees, such as line fees charged on the full limit even when unused
- Ask for the limit you need, not the biggest one offered
- Review it each year to see if it still suits your business
FAQs
Is a line of credit the same as an overdraft?
They work similarly. An overdraft is linked to your business transaction account. A line of credit may be a separate facility.
Can a new business get one?
It’s harder. Most lenders want at least a year or two of trading, though some options exist for newer businesses with security.
Will it affect my home loan application?
Yes. Lenders usually count the full limit as a debt, even if you haven’t drawn it. Keep the limit realistic if you plan to buy or refinance a home.
Albert Waldron is a Credit Representative (407514) of Australian Finance Group Ltd, Australian Credit Licence 389087. This is general information only and does not take into account your personal circumstances. Please seek advice before acting. Commercial and business loans are subject to lender approval, terms and conditions.