Lending to non-financial Australian businesses increased by $19.3 billion across the month of June, the largest monthly increase since March 2020, according to the latest data from APRA. That jump shows just how many business owners are turning to external finance to bridge cashflow gaps, cover day-to-day costs or fund growth.
Not every business needs the same kind of finance, though. Some want a lump sum for a single big purchase. Others need ongoing access to funds they can draw on and repay as their situation changes. A business line of credit is built for the second group. For those with inconsistent cashflow or occasional gaps to cover, that flexibility can make a real difference.
What is a business line of credit?
A business line of credit is a revolving finance facility that lets you draw funds up to an approved limit, repay them, then draw again, without reapplying each time. This sets it apart from a standard business loan, which delivers a fixed lump sum upfront that you repay over a set term regardless of how much of it you actually need at any given moment. A line of credit instead stays open in the background, ready to use as cashflow demands change.
How do business lines of credit work?
Once you’re approved for your business’ line of credit, you're given a credit limit you can draw down whenever you need to. You only pay interest on the amount you've drawn, not your full limit, and once you repay it, that amount becomes available to use again.
For example, if you're approved for a $100,000 line of credit and draw down $15,000, you'll only pay interest on that $15,000. Once you repay it, your full $100,000 limit is available again, ready for the next time you need it.
How much can my business borrow with a line of credit?
The amount you’re able to set as your credit limit varies depending on your lender and factors related to your business, as well as whether your credit line is secured or unsecured. For unsecured credit lines, you may be able to set a limit of up to $250,000 to $300,000, while secured limits could reach $1 million or more. You’ll be given a repayment period for each drawdown, which can range from one to four years. Some of the other main factors impacting the limit you're approved for include:
- Your business’ finances: lenders will look at your business’ financial situation, such as its revenue and expenses, to get an idea of how much debt it may be able to manage.
- How long your business has been running: even if your business has ample cash reserves, lenders will want to see a steady trading history before approving larger line of credit limits.
- The size of your business: you’ll be approved for a credit line that’s proportionate to your business. Smaller businesses are more likely to be approved for lower maximum limits, for instance, unless a particularly valuable asset is attached as security.
- Your business’ credit score and history: businesses with stronger credit profiles and a proven track record of managing similar debts are more likely to be approved up to a higher limit.
- Your lender’s maximum borrowing limit: different lenders have different borrowing limits, so you may be able to borrow more with some than others.
To continue the previous example, let’s say your lender will require you to repay the $15,000 within two years. You can choose to pay it off immediately if you’re able to, though. Each drawdown will trigger a new period, so if you have $7,500 of your $15,000 still outstanding after a year and you borrow another $15,000, the second drawdown will be payable over two years, rather than one.
Secured vs unsecured business lines of credit
| Secured | Unsecured | |
|---|---|---|
| Security required | Property or another business asset | None |
| Borrowing power | Higher, commonly up to between $500,000 and $1 million (or more) | Lower, commonly up to $250,000 to $300,000 |
| Interest rate | Generally lower, since the asset reduces the lender's risk | Generally higher, to offset the lender's added risk without any collateral |
| Speed of access | Slower, since the lender needs to value and register the security | Faster, often approved within one to two business days |
| Repayment terms | Often up to two to four years | Usually shorter, up to one to two years |
| Best suited to | Businesses with an asset to leverage for a larger facility | Businesses wanting fast access without tying up assets |
The main trade-off between the two comes down to cost and borrowing power vs ease of access. A secured line of credit generally gives you a lower rate and a higher limit, but it may take longer to arrange since the lender needs to value and register your security, and it puts that asset at risk if you can't meet repayments.
An unsecured line of credit is quicker to set up and doesn't require an asset, which suits businesses that need funds fast or don't have property or equipment to offer. That convenience typically comes at the cost of a smaller limit and a higher interest rate.
The businesses that can make use of a line of credit
A line of credit tends to suit businesses with variable or unpredictable income, rather than those with steady, predictable cashflow. Situations where it can be a good fit include:
- Seasonal businesses: a landscaping or retail business with quieter months can draw on a line of credit to cover expenses during the slow season, then repay it once trade picks back up.
- Businesses with irregular invoice payments: trades and consulting businesses waiting on client payments can use a line of credit to bridge the gap between doing the work and getting paid.
- Businesses building working capital reserves: having an approved facility sitting in the background gives you a buffer to draw on if an unexpected cost comes up, without needing to apply for finance under pressure.
- Businesses managing ongoing, smaller expenses: stock purchases, wage cycles or routine equipment repairs suit a facility you can draw down and repay repeatedly, rather than a one-off loan.
- Businesses wanting to avoid over-borrowing: since you only pay interest on what you draw, a line of credit can suit businesses that want access to funds without committing to a lump sum they may not fully need.
When a line of credit may not be the right fit
- Large, one-off purchases: buying equipment, vehicles or property is usually better suited to a chattel mortgage or secured business loan, which offer lower rates for a defined asset purchase.
- Long-term expansion projects: if you need a large amount upfront and know exactly how much you'll repay over a set term, a standard business loan usually works out cheaper than an ongoing facility.
- Businesses that struggle with repayment discipline: because funds are easy to redraw, a line of credit can lead to a cycle of debt for businesses that don't have a clear plan for repaying what they draw.
- Startups with no trading history: lenders generally want to see an established trading record and consistent revenue before approving a line of credit, so newer businesses may find it harder to qualify than more structured finance options.
How much will my business line of credit cost?
The cost of a business line of credit depends on several factors, and lenders structure it differently to a standard loan. Key factors include:
- Interest rate: charged only on the amount you've drawn, not your full approved limit. Rates are typically variable and move with the lender's benchmark rate.
- Establishment fee: a one-off cost to set up the facility, often either a flat fee or a percentage of your approved limit.
- Ongoing fees: charged monthly, quarterly or annually for keeping the facility open, regardless of how much you draw.
- Amount drawn down: the more of your limit you draw at any one time, the more interest you'll pay, as interest is calculated based on your outstanding balance.
- Frequency of drawdowns: drawing down and repaying often can add up in interest over time, even in smaller amounts, compared to drawing down less frequently.
- Time taken to repay balance: the longer a drawn amount sits outstanding, the more interest accrues, so faster repayment keeps costs down.
The following table shows just how much of a difference higher interest rates can make to your outstanding line of credit balance:
| Line of credit balance | Interest rate | Fortnightly repayment | Total interest paid | Total repaid over two years |
|---|---|---|---|---|
| $50,000 | 12.50% p.a. | $1,090 | $6,655 | $56,655 |
| $50,000 | 14.50% p.a. | $1,111 | $7,768 | $57,768 |
| $50,000 | 16.50% p.a. | $1,132 | $8,840 | $58,840 |
| $50,000 | 18.50% p.a. | $1,154 | $9,994 | $59,994 |
| Figures are illustrative only and calculated based on equal fortnightly repayments over two years, excluding fees. Actual repayments depend on your lender, facility structure and how you draw down and repay funds, and rates aren't guaranteed. | ||||
Business line of credit vs other commercial finance options
| Business line of credit | Business overdraft | Business loan | Business credit card | |
|---|---|---|---|---|
| Option for security | Yes | Yes | Yes | No |
| Maximum amount | $300,000 unsecured $1 million+ secured |
$250,000 unsecured $1 million+ secured |
$300,000 unsecured $5 million+ secured |
$50,000+ |
| How interest is charged | On the amount drawn only | On the amount drawn only | On the full loan amount | On the outstanding balance after any interest-free period |
| Common fees | Establishment fee, ongoing facility fee | Establishment fee, ongoing facility fee | Establishment fee, ongoing account fee (one or both can be waived) | Annual card fee, cash advance fee |
| Repayment term | Ongoing | Ongoing | Up to 5-7 years unsecured Up to 30 years secured |
Ongoing |
| Repayment structure | Flexible, minimum repayments on the drawn balance | Overdraft linked to your business transaction account, repaid as funds move through it | Fixed instalments over an agreed term | Minimum monthly repayment, interest-free period if paid in full |
Case study: David’s business line of credit
David runs a small café in regional Victoria. His revenue is steady through the week, but takings drop noticeably over winter as foot traffic slows and can fall short of covering rent, wages and supplier invoices.
To manage this seasonal dip, David applies for an unsecured business line of credit with a $100,000 limit. The facility gives him a buffer to draw on when trade is quiet without needing to manage and repay a lump sum loan.
When a slow patch hits in July, David draws down $20,000 to cover wages and stock costs while takings catch up. He leaves the remaining $80,000 of his limit untouched, so he only pays interest on the $20,000 he'd drawn.
David repays the balance over six months at a rate of 15.00% p.a. His repayments work out to around $3,480 a month for a total of $20,882 repaid, including $882 in interest. Once the balance is cleared, David's full $100,000 limit becomes available again, ready for the next time trade slows or an unexpected cost comes up.
Using your line of credit for operating losses? Think again
"A line of credit is best used to smooth out short-term cashflow gaps, not to cover ongoing operating losses. If your business is regularly running at a loss, borrowing to plug the gap can compound the problem, rather than solve it."
Why apply for a business loan with Savvy?
The pros and cons of business lines of credit
Pros
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Access funds when you need them
Unlike more traditional business lending, you’ll be able to withdraw as much as you like as many times as you like (provided it’s within your limit).
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Pay off your balance at your own pace
You’ll be able to chip away at your balance at times that are most convenient for your business, although you’ll need to clear it within a certain period.
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Only pay interest on what you use
You’ll only pay interest on your outstanding balance, rather than the full line limit, so you won’t need to pay a premium for funds you won’t use.
Cons
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Higher interest rates and fees
Compared to other business loans, you’ll likely have to pay more in interest and fees to borrow your funds.
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Greater temptation to spend
Because money is easier to access once your line of credit is open, you may be more tempted to spend where you don’t need to or may not be able to comfortably afford.
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Potential for costs to mount quickly
Letting your balance build up and not paying it down promptly could result in a very steep interest bill.
How to apply for a business line of credit with Savvy
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Fill out our form
Supply details on your business and how much you want access to.
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Send your documents
We’ll need evidence of your identity and business finances to verify your profile.
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Speak with your broker
Your broker will give you a call to chat about your available options.
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Have your application submitted
We’ll put together all the details for formal assessment by your lender.
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Get approved and seal the deal
Once you’re formally approved, you can sign off and gain access to your line of credit!
