The short answer
A business line of credit is an approved borrowing limit that a business can draw on, repay and draw again, paying interest only on the amount it uses. Funds are usually drawn through an online portal and arrive in the business account within hours. Unlike a term loan, there's no lump sum to start paying back from day one. The limit sits ready for wage weeks, stock orders or a slow-paying customer. Unsecured lines of credit from non-bank lenders are assessed on turnover and bank statements, with limits for established businesses often up to around one month of turnover. Lines secured against property can go much higher at a lower rate. Costs usually include interest on the drawn balance, and may include an establishment fee, a monthly line fee or a fee on undrawn funds. Some non-bank lines require each drawdown to be repaid over a set period, so check how repayments work before you sign.
How does a business line of credit work?
The lender approves a limit, say $100,000. You draw what you need, when you need it, up to that limit. Interest runs only on the drawn balance, and as you repay, the available limit refills. Limits are usually reviewed each year, and the lender can adjust them based on how the business has traded.
Repayment rules vary. Some facilities let you repay whenever you like as long as interest is paid. Others, common with non-bank lenders, set a fixed repayment schedule for each drawdown, for example over six or twelve months.
Line of credit or overdraft?
| Feature | Business overdraft | Business line of credit |
|---|---|---|
| Where it sits | Linked to your transaction account at the same bank | A separate facility, drawn into any business account |
| Typical provider | Banks | Banks and non-bank lenders |
| Security | Often secured, sometimes over property | Unsecured for smaller limits, secured for larger ones |
| Repayments | Flexible, within the limit | Flexible or a set schedule per drawdown |
| Speed to set up | Weeks at many banks | Days with many non-bank lenders |
What does a line of credit cost?
Look at every component, not just the rate:
- Interest on the drawn balance, usually calculated daily.
- A line fee or undrawn fee, charged on the limit whether or not you use it.
- Establishment and annual review fees.
- Drawdown fees on some non-bank facilities.
Suppose a business has a $100,000 limit, draws an average of $40,000 for three months of the year and pays an assumed 18% a year on the drawn balance. That's about $1,800 of interest, plus whatever line fees apply. A term loan for the full $100,000 would charge interest on all of it from day one.
Example only. It isn't a real client, and the pricing is an assumption for illustration. Your cost depends on the lender and your business. Run your own numbers in the repayment calculator.
How large a limit can you get?
Unsecured limits from non-bank lenders are usually tied to turnover, often up to around one month of average deposits for an established business. Limits secured against residential or commercial property can be several times higher and cheaper, because the lender relies on the property. Some businesses combine both: a small unsecured line for everyday swings and a property-backed facility for larger needs.
When is a line of credit the right tool?
It suits recurring, short gaps: seasonal stock builds, uneven wage weeks, customers paying on 60-day terms, or a buffer for unexpected costs. It's the wrong tool for buying a long-life asset, where equipment finance is cheaper, or for covering ongoing losses, where more debt deepens the problem.
What do lenders look at?
The same things as for unsecured business loans: trading time, turnover and its consistency, how the account is run, existing debt, ATO position and credit history. Lenders like to see that the facility will be drawn and repaid in cycles, not drawn to the limit and left there.
