Quick answer
A business line of credit is best for trading businesses with uneven cash flow, such as seasonal peaks, slow-paying customers or recurring stock purchases, because you draw only what you need and reuse the limit as you repay. It's not suited to one-off long-term purchases or covering ongoing losses. Check fees on the limit, how repayments are set and how often the limit is reviewed.
Key points
- Draw, repay, redraw up to an approved limit.
- Best for recurring, uneven cash needs.
- Fees can apply to the limit even when it isn't drawn.
- A balance that never clears means the structure doesn't fit.
- Typical use
- Stock, seasonal dips, contract gaps
- Unsecured range
- Typically $5,000 to $500,000
- Warning sign
- Balance never returns to zero
A line of credit is the closest thing business lending has to a safety net. It sits there, ready for the month when a big customer pays late, the stock order is bigger than usual, or winter takings dip. Used that way, it’s one of the most efficient tools available. Used as a permanent loan, it quietly becomes an expensive one.
How does it work?
You’re approved for a limit. Business.gov.au describes lines of credit in its funding guide as letting a business borrow up to a set limit. You draw when you need cash, repay when it comes in, and the limit is available again. Repayments are generally based on the drawn balance.
Unsecured lines for trading businesses are typically sized on turnover and bank statements, in the $5,000 to $500,000 range. Larger limits may be secured against property.
Our scorecard
| Test | How a line of credit scores |
|---|---|
| Security | Unsecured with a director guarantee, or property-secured for larger limits |
| Flexibility | Very high: draw and repay as needed |
| Paperwork | Once at setup, then periodic reviews |
| Total cost | Efficient when drawn briefly; limit fees and a stuck balance raise it |
| Fit to the job | Excellent for recurring swings; poor for one-off long-term purchases |
Our verdict
Our verdict on business lines of credit
- Best for
- Seasonal businesses, contractors paid on progress claims, wholesalers and retailers buying stock ahead of sales, and businesses with slow-paying customers.
- Not for
- One-off purchases repaid over years, covering continuing losses, or owners who know they'll treat the limit as spare money.
- Check before you sign
- Fees on the limit, how repayments on drawn amounts are set, review frequency and what triggers a limit cut.
The line of credit wins whenever the cash need comes and goes. You pay mainly for what you use, when you use it, and the facility is there for next time without reapplying.
It loses when used for something permanent. A fit-out or vehicle funded on a line of credit leaves a balance that never clears, eats the limit you wanted for emergencies, and may cost more than a term loan would. Our line of credit versus term loan verdict goes through this in detail.
The Loan Finder ranks a line of credit highly when your answers point to seasonal or lumpy cash flow. Or ask a specialist whether one suits you.
Illustrative example: a wholesaler with slow payers
Illustrative only. A food wholesaler supplies independent grocers and a few larger chains. The chains pay on long terms; suppliers want paying in 14 days. The gap moves around month to month.
A line of credit sized to the widest gap lets the owner pay suppliers on time and repay as the chains pay. In a typical year the balance goes up and down many times and returns close to zero after the Christmas period.
Verdict for this owner: a line of credit, sized to the real gap.
How do you keep a line of credit healthy?
- Aim for zero regularly. If the balance hasn’t been near zero in a year, part of it is really a term loan.
- Don’t fund long-term purchases on it. Use a term loan or asset finance instead.
- Shrink the gap first. Business.gov.au’s cash flow tips and its guide to payment terms can reduce how much you need.
- Prepare for reviews. Keep bank statements tidy and usage sensible.
For specific uses, see funding peak-season stock, funding a big contract and the best loan for a slow quarter.
How big should your limit be?
Bigger isn’t better. A limit that’s far larger than your real need can attract higher fees, tempt the business to treat it as spare money, and make reviews harder. A limit that’s too small leaves you short at the worst moment.
A practical method:
- List your monthly cash in and cash out for the past year, or forecast the next one.
- Find the month where the running balance is lowest.
- That low point, plus a sensible margin, is roughly the limit you need.
Revisit it each year. If the business grows, the gap grows with it; if you’ve improved collections or supplier terms, it may shrink.
Line of credit or overdraft or business card?
| Feature | Line of credit | Overdraft | Business card |
|---|---|---|---|
| Linked to transaction account | Sometimes | Usually | No |
| Typical limit | Moderate to large | Small to moderate | Small |
| Best for | Planned swings, stock, contract gaps | Day-to-day buffer | Small purchases, travel |
| Watch | Limit fees, reviews | Fees, review terms | Card fees and repayment terms |
The labels vary between lenders and the details matter more than the name. Compare limit-related fees, how repayments are calculated and how the facility is reviewed, not just what it’s called.
Questions to ask before you sign
- What fees apply to the limit, whether or not I draw on it?
- How are repayments calculated on what I’ve drawn?
- How often is the limit reviewed, and what could trigger a reduction?
- Is it secured, and if so, against what?
Would a safety net help?
Tell us how your cash moves through the year, and a specialist will tell you whether a line of credit fits and what limit makes sense.
There’s no credit check when you first ask, and your enquiry isn’t sent to a list of lenders. Describe your peaks and troughs honestly; they decide the right limit far more than your best month does.
Frequently asked questions
How does a business line of credit work?
You're approved for a limit. You draw funds when needed, repay as cash comes in, and can draw again up to the limit. Repayments are generally based on what you've drawn.
Is a business line of credit secured or unsecured?
It can be either. Unsecured lines for trading businesses are typically sized on turnover and bank statements. Larger limits may be secured against property.
Do I pay anything if I don't use the line of credit?
Possibly. Some facilities charge a fee on the limit whether or not you draw. Check the fee structure before signing.
How is a line of credit different from a credit card?
Both are revolving, but a business line of credit usually has a higher limit, different repayment terms, and is designed for business cash flow rather than everyday purchases.