Quick answer
A line of credit is a pre-approved borrowing limit a business can draw from whenever it needs to, repay, and then draw again. Interest is charged only on the amount actually used, though many lenders also charge a fee on the whole limit. In Australia lines of credit are offered by banks, often secured by property, and by online lenders on an unsecured basis, and they suit uneven or seasonal cash flow.
Key points
- A revolving limit: repaid funds become available to draw again
- Interest applies to the drawn balance; a line fee may apply to the full limit
- Bank lines are usually reviewed yearly and can be reduced at review
- Built for short, recurring gaps rather than long-term purchases
Think of it as a tap rather than a bucket. A term loan pours the whole amount into your account at once and you repay it over a fixed period. A line of credit sits ready at an agreed limit, and you turn it on only when cash runs short, then let it refill as money comes back in.
How the limit moves
Say a lender approves a $40k limit. You draw $15k to cover wages in a slow fortnight, leaving $25k available. When customers pay and you put $10k back, your available amount rises to $35k. Interest is worked out on the $5k still owing at that point, not on the full $40k. This draw-and-repay cycle is what makes it revolving credit.
Two costs usually run side by side:
- Interest on what’s drawn, calculated on the outstanding balance.
- A line fee or account fee on the whole credit limit, charged for keeping the money available.
The second cost catches people out. A $100k limit that is barely touched can still cost several hundred dollars or more a year.
Bank lines vs online lines
The name is the same, but the products behave differently.
| Typical bank line | Typical online lender line | |
|---|---|---|
| Security | Often residential or commercial property | Usually unsecured, with a director guarantee |
| Sizing | Based on equity and financials | Based on turnover and bank statements |
| Repaying | Flexible, often interest-only on the drawn balance | Each drawdown may become its own short repayment schedule |
| Review | Yearly, sometimes with fresh financials | Ongoing account monitoring |
| Speed to set up | Days to weeks | Often within days |
The online version can feel like a string of mini-loans. Draw $10k and it may be repaid in fixed weekly instalments over a set number of months, even if you’d rather clear it in one go once a big invoice lands. Ask exactly how repayments work for each draw before you sign. Our guide to secured vs unsecured lines of credit covers the trade-off in more depth.
A seasonal example
A landscaping business on the Sunshine Coast has a $40k unsecured line. Every September it draws about $25k to stock plants, soil and mulch, and to put on two extra crew members before the spring rush. By December the client payments have come in and the balance is back to nil. For most of the year the owner pays only the line fee. For roughly three months they also pay interest on a balance that shrinks week by week.
That’s a line of credit used well: short, predictable gaps that clear themselves. Modelling the size of your own gap in the cash flow gap calculator is a good start, and our landscapers business loans page looks at the trade more closely.
Considering a limit for your own quiet months? Check what your business could access in about a minute.
The habit that gets limits cut
A line that sits at or near its maximum for months on end tells a lender the business has a permanent shortfall, not a timing gap. At the next review that can mean a lower limit, a request for security, or a suggestion to convert the balance into a term loan. Some facilities also expect the balance to be cleared, or brought down, for a period each year. If your line never comes back down, a term loan for the core amount plus a smaller line for the swings is usually the cleaner structure. The line of credit vs term loan comparison explains when each wins.
Related terms
Overdraft, working capital, business line of credit, secured line of credit and cash flow.
Want a buffer for the uneven months?
A standby limit takes the pressure off when wages, stock and slow payers all collide. Our enquiry form takes around a minute, and filling it in won’t touch your credit file. We don’t scatter your enquiry across a pile of lenders; a person on our team reads what you’ve told us and phones you to discuss limits and security. List your real monthly turnover and any property you could offer, because that decides which kind of line we suggest first.
Frequently asked questions
Is a line of credit the same as an overdraft?
They're close cousins. An overdraft is attached to your everyday transaction account, so it is used automatically when the balance drops below zero. A line of credit is usually a separate account you transfer from deliberately. Pricing, security and review terms can also differ.
Do I pay anything if I don't use my line of credit?
Often, yes. Many lenders charge a line fee or account fee on the full approved limit, whether or not you draw on it. Ask for the yearly cost of simply holding the facility before you accept it.
How much of a line of credit can my business get?
Unsecured lines are usually sized on turnover and bank statements, so they tend to be smaller. Lines secured by residential or commercial property can be much larger, depending on the equity available.
Can a lender cancel or reduce my line of credit?
Most facilities are reviewed periodically, and the agreement normally lets the lender lower or close the limit at review or if your circumstances change. Banks bound by the Banking Code of Practice have notice obligations for some changes.
Should I use a line of credit to buy equipment?
It's usually not the best fit. Equipment that lasts several years is better matched with a term loan or equipment finance, leaving the line free for short-term needs such as wages, stock and supplier bills.