Quick answer
A business line of credit is an approved limit you can draw from when you need money, repay, and draw again. Unlike a lump-sum loan, you only pay interest on what you've actually used, although there may be a fee to keep the limit open. It suits repeating, short-term needs like stock before a busy season or waiting on customers to pay.
Key points
- A line of credit is a limit, not a lump sum: draw, repay, draw again.
- Interest is charged on what you use; a line fee may apply to the limit.
- Best for repeating, short-term gaps, not long-term purchases.
- Limits for unsecured lines are sized on turnover and bank statements.
- How it works
- Draw, repay, redraw
- You pay interest on
- The amount used
- Good for
- Stock, cash gaps, seasonal peaks
Some business money problems aren’t one-off. They come back again and again: stock before Christmas, wages while you wait for a big invoice to be paid, supplies before a busy season. For those, a lump-sum loan can feel clumsy. That’s where a line of credit comes in.
What is a line of credit, in one sentence?
A line of credit is a pot of money you’re allowed to dip into, up to a set limit, whenever you need it.
business.gov.au describes it simply as borrowing money up to a certain limit. You draw what you need, pay it back when cash comes in, and the room becomes available again. It’s a bit like a tap you can turn on and off, rather than a bucket of water delivered all at once.
How does it work day to day?
Let’s walk through it.
- You’re approved for a limit. Say $50,000. Nothing is borrowed yet.
- You draw what you need. You move $18,000 across to pay for stock.
- You pay interest on the $18,000, not the full $50,000.
- Customers pay you, and you repay. The $18,000 goes back, and your available room returns to $50,000.
- Repeat when the next gap comes along.
There may also be a line fee, which is a charge for keeping the limit available whether or not you use it. Always ask.
Line of credit vs a lump-sum loan
| Line of credit | Lump-sum term loan | |
|---|---|---|
| How you get the money | Draw as needed up to a limit | All at once |
| Interest charged on | What you’ve drawn | The full balance owing |
| Repayments | Flexible, often a minimum amount | Fixed schedule until cleared |
| Can you reuse it? | Yes, once repaid | No; you’d need a new loan |
| Best for | Repeating, short-term gaps | One-off purchases with a long life |
A simple rule of thumb: match the finance to how long the need lasts. Stock you’ll sell in eight weeks suits a line of credit. An oven you’ll use for eight years suits a term loan.
When does a line of credit make sense for a first-timer?
It tends to suit businesses where:
- money comes in unevenly, with busy and quiet periods
- customers pay on terms (30, 60 or more days), so you’re often waiting to be paid
- you buy stock in bulk before a peak and sell it through over weeks
- you want a safety net for surprises without borrowing a lump sum you don’t need yet
Our illustrative story about an online shop shows a line of credit working through a pre-Christmas stock build.
Think this might fit how your business earns money? Start a quick enquiry and a real person will tell you whether a line of credit or a loan suits you better. There’s no credit check just to ask.
How is a line of credit limit worked out?
For unsecured lines, the limit is mostly sized on your turnover and bank statements. The lender wants to see:
- steady money coming into a business account
- that the business can repay drawings as cash arrives
- how the account is managed: regular dishonours or constant overdrawing are red flags
Unsecured and cash-flow facilities for trading businesses typically range from $5,000 to $500,000. If you own property, a larger facility may be possible using it as security. Lesson two covers secured vs unsecured if you need a refresher.
What are the traps to avoid?
Lines of credit are handy, which is exactly why they need a little discipline.
- Don’t let it become permanent debt. If the balance never comes down, you’re really using it as a long-term loan, and probably paying more than you need to.
- Don’t use it for long-life purchases. Equipment, fit-outs and vehicles usually belong on a term loan.
- Watch the fees. A big limit you rarely use can cost you in line fees for nothing.
- Keep a buffer. Don’t draw to the limit every month; leave room for genuine surprises.
A good habit: check the balance at the end of each quarter. If it’s gone back to zero (or close to it) at least once, you’re using it the way it was designed.
Quick check: is your need short or long?
Before choosing between a line of credit and a loan, ask yourself these three questions:
- Will the thing I’m buying turn back into cash within a few months? Stock and materials for a specific job usually do. That points to a line of credit.
- Will I use it for years? Equipment, vehicles and fit-outs do. That points to a term loan.
- Does this need come back every year? A repeating seasonal gap is a line of credit’s favourite job. Our lesson on choosing the right loan matches more purposes to loan types.
Answer honestly and the right tool usually picks itself. And if your answers are mixed, that’s fine: some businesses use a small line of credit for everyday swings and a separate term loan for a single bigger purchase.
Is a line of credit right for you?
If your business has regular ups and downs and trades through a business bank account, a line of credit could be a gentle, flexible first step into borrowing.
The easiest way to find out is to ask. Our enquiry takes about a minute and doesn’t trigger a credit check. We don’t send your details to a list of lenders; one real person handles your enquiry and explains whether a line, a loan or nothing at all is the smart move. Accurate answers about your turnover make that advice much more useful.
Frequently asked questions
Is a line of credit the same as an overdraft?
They're close cousins. Both let you draw up to a limit. An overdraft is attached to your everyday transaction account, while a business line of credit is often a separate facility. The practical idea is the same: flexible access to money up to an agreed limit.
Do I pay interest if I don't use it?
Generally interest is only charged on the amount drawn. Some lines charge a fee for keeping the limit available, so ask whether there's a line or facility fee.
Can a new business get a line of credit?
It's harder without trading history, because unsecured limits are sized on turnover and bank statements. A business with some months of steady income through a business account has a much better starting point.
Should I use a line of credit to buy equipment?
Usually not. Equipment lasts years, so it's normally better paid off with a term loan whose repayments match the item's life. A line of credit is best for short, repeating needs.