Business Line of Credit

A business line of credit offers the flexibility of a credit card, but with higher borrowing limits. It gives you the ability to draw on funds when you need it, and pay interest only on what you borrow. You can choose between a secured or unsecured line of credit.

What is a business line of credit?

A business line of credit is a type of business loan and is different from standard business term loans. Instead of receiving the loan amount as a lump sum payment, you can receive funding on an ongoing basis. This allows you to draw down funds when you need it and borrow up to a specific credit limit. You only repay the amount borrowed, inclusive of interest.

How does a business line of credit work?

Think of it as a credit card, but with higher borrowing limits and lower interest. While you're approved for a set credit limit, you're only responsible for paying back what you actually use. This will include fees charged by the lender. You'll also be charged interest only on what you've borrowed, and not the entire amount. In this way, a line of credit functions more like a credit card than a normal business loan. Apart from interest, you will also be charged an establishment fee and a monthly service fee.

There are 2 types of business lines of credit: secured and unsecured. Depending on the lender, you may be required to put up an asset as security.

Common features of business lines of credit:

• Interest rates and fees. Interest rates tend to be higher for lines of credit than business term loans, but they are usually lower than credit cards. You can expect to pay fees on top of interest, including establishment and monthly account keeping fees.
• Type of interest. Interest tends to be mostly variable. That means that your interest rate can change at any time, based on the market rate.
• Loan amounts. Smaller borrowing limits than business term loans but higher than credit cards.
• Loan term. Repayment terms are flexible and based on your business' needs.
• Repayments. Repay only what you borrow. You can make weekly or monthly repayments, or pay in a lump sum. Like a credit card, lenders may allow you to pay a minimum or a percentage of your monthly balance. Meaning you'll have ongoing debt with no set end date, making it difficult to manage.

How do I know a business line of credit is right for me?

A business line of credit can give you greater control and flexibility over your cash flow. It's a popular loan option for businesses of all sizes, but it comes with limitations. Here's what you need to consider:

• What do I need the loan funds for? A line of credit is useful if you want to cover overheads, payroll during the off-season, buy inventory or if you're waiting for clients to pay you. It isn't suitable if you want to make big purchases, such as property or equipment.
• Do I want the funds in a lump sum or on an ongoing basis? If you want the loan funds upfront in a single release, then a term loan is more suitable. But if you want funds on an ongoing basis, a line of credit may be the better option.
• How much do I need to borrow? Each business loan has its own maximum and minimum borrowing amounts. Look at the borrowing amounts to decide whether the loan will adequately service your needs.
• Do I want the option to access more credit? A fixed term loan is hard to top up and usually involves having to take out another loan. If you think you'll need top ups, a line of credit may be a better option.

How can I compare business lines of credit?

• Interest rates Check how much interest you'll be charged for a business line of credit. Interest adds to the cost of your loan, so it's important to check the rate you'll be paying. Lines of credit typically have higher interest rates than business loans because of the convenience offered. Keep in mind that you'll only be charged interest on the amount you use, not the entire amount you're approved for.
• Fees. You shouldn't overlook how much you'll be paying in fees. This will add to the cost of your loan. Take note of what the establishment and monthly ongoing fees are. Also check for additional fees such as: annual charges, ATM and transaction fees.
• Repayment flexibility. A line of credit provides flexible finance that extends to repayments. You may be able to make interest-only repayments or pay in a lump sum. Look into which lender offers you the flexibility you want, allowing you to repay the loan based on your cash flow.
• Secured or unsecured? You may want to narrow down your choices depending on whether you can offer security.
• Borrowing amounts. Look for a lender who is able to offer the amount you need to borrow. Borrowing amounts can start from as low as $1000 and go up to $15 million.

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Pros and cons of business lines of credit

Pros.

• Flexible loan. Borrow what you need when you need it. This gives you greater control over your finances.
• Pay interest only on what you use. You don't have to pay interest on the entire loan, but only on the funds you draw down.
• Can be useful in a tight spot. It can cover unexpected business expenses and is useful if you need seasonal funding.

Cons.

• Cost can be difficult to predict. It may be difficult to predict your monthly repayments. This is because interest for variable rates could fluctuate on a monthly basis. It may also make it difficult to predict how much the loan will cost you overall.
• Debt doesn't come with a finish line. It's up to you to pay down the debt, and without a set repayment period, this may be difficult. Remember to stay on top of your repayments to minimise the interest paid.
• Higher interest in exchange for flexibility. The loan is flexible, but this flexibility comes at a higher cost.
• Smaller loan amounts. Borrowing limits are typically smaller than term loans.

What should I consider before applying?

• Cost and affordability. Lines of credit are more expensive than term loans. With higher interest rates and overall costs, you need to consider whether your business can afford it. With variable interest rates, it's harder to predict repayments. If you're not disciplined with your repayments, this could lead to problems further down the line. It could easily become an unpredictable business expense.
• Unstructured repayments. Lines of credit don't have the same repayment structure as term loans. There isn't a set repayment date so it's up to you to exercise discipline and caution.
• Eligibility. As with all loans, you need to consider whether you're eligible to apply. Check if you meet all their requirements including business age and turnover. Only apply if you tick all the boxes. Keep in mind that every loan application shows up on your credit report. Several applications within a short period can have a negative impact on your credit score. This can make it harder for you to get a loan in the future. Select a single loan and lender that you're eligible for and that suits your needs and apply with them.
• Lender's reputation. Make sure the lender you're applying with is registered with ASIC and is reputable.

What should I avoid with a business line of credit?

• Borrowing more than you can afford. You may find it easy to borrow more than your business needs or can afford. You may have been given a credit limit, but that shouldn't be an excuse to spend more than what is required. You should also ask for what you need and nothing more. By borrowing more, you can get into too much debt and put your business in financial distress.
• Taking too long to repay. Interest and charges will accrue on the balance left unpaid. This means that the longer you wait to pay back the loan, the more expensive it gets. As you don't have a fixed period to repay the loan, the debt can easily get out of hand. Avoid this by paying back as much as you can.

What are my other options?

If a business line of credit doesn't sound right for you, there are a number of other financing options available. These include:

• Business overdrafts
• Small business loans
• Secured business loans
• Unsecured business loans
• Peer-to-peer business loans
• Invoice financing
• Equipment finance

How can I apply for a business line of credit?

🤔 Work out whether you need secured or unsecured finance, how much you need to borrow and what you can afford.
🔎 Start comparing lenders and loan products. Don't forget to compare interest rates, fees and eligibility criteria. You can use the comparison table above.
✅ Select a lender.
🖨️ Organise and prepare the required documentation. This will make the application process easier.
📱 Apply. Most lenders have their applications online.

Frequently Asked Questions

• What's the difference between a business line of credit and a business overdraft?

  An overdraft is attached to your transaction account. It allows you to access additional funds, up to an approved limit, once your account has run out of funds. In contrast, a line of credit is available to be used any time, and isn't tied to your transaction account.

• What documents do I need to provide?

  You'll need to provide your business financials, including bank statements and balance sheets. They will also require identification, proof of income, your ABN, business address and details such as how long you've been in business. This will change based on the lender, and the lender will specify what they require.

Written by

Elizabeth Barry

Lead Editor

Elizabeth Barry was the lead editor for Finder. She has over 10 years' experience writing about a range of topics with a focus on personal finance. You’ll find her writing and commentary in a range of publications and media including Seven News, the ABC, MSN, the Irish Times and Singapore Business Review. See full bio

Elizabeth's expertise

Elizabeth has written 211 Finder guides across topics including:

• Banking
• Personal finance
• Investing