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A business line of credit is a flexible, revolving loan that lets you borrow up to a set limit and pay interest only on what you use.
It’s commonly secured by property, offers lower rates than overdrafts or credit cards, and is best for managing short-term cash flow gaps. Used carefully, it can stabilise seasonal or uneven income.
What is a business loan line of credit?
A business line of credit is a revolving loan facility that allows a business owner to draw funds as needed, repay them, and reuse the limit without reapplying. Interest is charged only on the drawn amount, not the full approved limit.
A business line of credit loan Think of it like a large, reusable credit card secured by property, but with much lower interest rates and higher limits.
Why Do Businesses Use A Line Of Credit?
Most businesses need a smooth cash flow and have to manage short-term expenses. They also have timing gaps between income and expenses. This is especially true for seasonal businesses, growing companies, or owners who want a safety buffer without locking into a fixed loan.
A business line of credit can help these business to:
- Cover payroll during slow months
- Pay suppliers while waiting on invoices
- Manage seasonal sales fluctuations
- Bridge temporary cash flow crunches
So, many business owners set up a line of credit just in case. They only draw on it during tight periods, which helps to keep the interest cost low while preserving flexibility.
How Does A Business Line Of Credit Work?
The bank sets a credit limit and variable interest once your loan is approved. You can then draw funds at any time, repay them and redraw again. There’s no fixed term, and you usually only need to meet ongoing interest payments.
Here’s how this works step-by-step:
- You apply for a line of credit like any other loan
- The lender assesses security, income, and serviceability
- A credit limit and variable rate are approved
- You draw funds only when needed
- Interest applies only to the amount used
The key difference here with a standard loan is that there’s no forced principal repayment schedule unless the bank reviews your business or reduces the limits.
How much can I borrow with a business line of credit?
Your borrowing limit depends on the value and type of security, your income, and your existing debts. Most business LOCs start at $10,000, while property-backed facilities can exceed $500,000.
| Factor | What Lenders Look For |
|---|---|
| Residential Property Security | Up to 80% loan-to-value ratio (LVR) |
| Commercial Property Security | 50% to 80% loan-to-value ratio (LVR) |
| Other Security | Property + business assets may be combined |
| Minimum Limit | Usually $10,000 |
| Maximum Limit | Based on available equity |
| Interest Type | Variable rate only |
Serviceability explained
Lenders check whether your personal income can cover:
- Interest on line of credit
- Existing home loans
- Business loans and liabilities
They usually request:
- Latest personal tax return
- Last two years of business financials
Do You Need To Explain Your Line Of Credit?
Well, it depends on the bank. The short answer is sometimes.
A bank may ask about the use-case if:
- The limit is large
- The facility appears unused
- The business cash flow is inconsistent
Since the bank doesn’t earn interest if your line of credit isn’t being used, the bank may question you about it and find it less attractive to keep it open for a long term.
What Are The Risks Of A Business Line Of Credit?
The biggest risk is overuse. Because repayments are flexible, interest can quietly accumulate, and property is often used as security.
A few risks you need to consider:
- Interest can compound if balances stay high
- Easy access may encourage overspending
- Property security increases personal risk
Here’s what you can do to mitigate these risks:
- If cash flow improves: pay down the balance aggressively
- If usage becomes constant: a standard term loan may be cheaper
- If discipline is an issue: an LOC may not be the right product
Business Line Of Credit Vs Overdraft – Which Is Better?
A line of credit usually suits ongoing or seasonal cash flow needs, while an overdraft works better for very short-term gaps when you don’t want to secure the loan with property.
| Feature | Line Of Credit | Overdraft |
|---|---|---|
| Security Required | Usually Property | Often Unsecured |
| Interest Rate | Lower | Higher |
| Best For | Ongoing Or Seasonal Use | Short-term gaps |
| Typical Usage | Months At A Time | Weeks to a few months |
| Risk | Property-backed | Higher Interest Cost |
What Fees Apply To A Business Line Of Credit?
Business line of credit often include setup, account, and transaction fees. Importantly, some fees are charged on the approved limit, not the amount you use.
- Application Fee: 0.75% to 1.0% of approved limit
- Monthly Account Fee: Varies by lender
- Transaction Fees: Negotiable in many cases
- Interest Rate: Variable (often BBSY + margin)
Line fees are based on your total limit, even if you only draw a small portion.
Is A Business Line of Credit Reviewed Every Year?
Most business lines of credit are reviewed every five years, not annually.
Banks assess how frequently the facility is used and whether repayments have been made on time before renewing or adjusting the limit.
And as we mentioned earlier, if the business line of credit remains unused, the bank reduces the limits.
When Is A Business Line of Credit A Good Idea?
A business LOC works best when cash flow is uneven but predictable, and the business owner is financially disciplined.
It is a good fit for you if your:
- Income is seasonal
- Cash flow timing is uneven
- You want a flexible loan structure
- You rely on it permanently
- You struggle with debt discipline
- You don’t want to use property as security
Not ideal if:
Ask about a business line of credit
If you need a cheap and easy cash flow solution, a business line of credit may be just what you need.
Give us a call on 1300 889 743 or complete this online enquiry form and one of our mortgage brokers will get in touch and let you know if you qualify.
We will find you a lender that will offer you the best interest rate and terms based on your situation.
Find out more about the business loan solutions that we can help you with.