A business line of credit is a flexible finance option that gives businesses instant access to cash, up to a predetermined limit. The best part? You only pay interest on the funds you draw, not the entire credit facility. Find out if it’s the right finance option for your business.
Key points about business lines of credit
- The median amount requested for a business line of credit is $40,000, according to Lend proprietary data
- Businesses most commonly use an unsecured line of credit, which doesn’t require collateral
- A business line of credit typically has higher interest rates than a traditional term loan
- The most common reason businesses use a line of credit is to access working capital
What is a business line of credit?
A business line of credit (LOC) works like a credit card. You receive a credit line to draw funds from as you need up to a predetermined limit. You then repay the funds you accessed with interest.
Both bank and non-bank lenders offer business lines of credit. With a revolving line of credit, you can reuse the funds as many times as you want once you repay your balance. You don’t have to reapply for a new line of credit each time. The available credit limit renews when you repay the borrowed amount. Lenders often offer a revolving line of credit to established businesses to cover regular expenses or cashflow fluctuations.
Is a business line of credit secured or unsecured?
A business line of credit can be secured or unsecured. A secured credit line requires some collateral (e.g. property, land, vehicles or other assets) as security for the funds you borrow.
An unsecured business line of credit doesn't require collateral, making it an easy finance option for businesses. This comes with higher interest rates (like an unsecured business loan).
Secured vs unsecured business line of credit: Which is best?
A secured line of credit can get you lower interest rates and better credit limits. However, it typically requires more paperwork if you need to provide value assessments for the collateral you provide. An unsecured line of credit is much easier to obtain but does come with higher interest rates and lower credit limits.
|Secured business line of credit
|Unsecured business line of credit
|Lower interest rates
|Higher interest rates
|Guaranteed by collateral such as residential property or business assets
|Not secured by any asset
|Higher credit limit
|Lower credit limit
|More paperwork involved
|Quicker application process
Business line of credit interest rates
Interest rates on a business line of credit range from 10-15% p.a. Your lender will determine your individual rate based on your business financial information and creditworthiness and whether the line of credit is secured or unsecured.
Remember that you only pay interest on the amount you've actively borrowed (used balance), not your entire credit limit. For example, if you have a line of credit of $50,000 and you withdraw $20,000, you would pay interest on the $20,000. This allows you to work with your existing cashflow and should cost you less than a short-term business loan.
Keep in mind that you'll need to keep meeting your interest payments on any amount you draw until you pay it back, so it can get costly if you only pay the interest and not the principal. On the flip side, you don't pay interest when you don't access any of the funds.
Interest on a line of credit is calculated using the average daily balance method. The lender takes the sum of daily balances over your billing cycle and divides this sum by the number of days in the billing cycle.
Business line of credit terms
Business lines of credit typically have terms ranging from 3 to 30 months. On the other hand, a revolving line of credit has no set term; once you have paid back the amount, you can draw down again. Different lenders have different minimum and maximum loan terms.
Who’s eligible for a business line of credit?
Most Australian businesses and sole traders can qualify for a line of credit if they meet the lender’s minimum criteria, including:
- Active ABN or ACN: This shows you’re operating a business registered in Australia.
- Trading history of six to 12 months: How long you’ve been in business is a big factor. Banks usually require a longer operating time than non-bank lenders.
- Financial statements: You must provide bank statements to show your business can meet its repayment obligations.
- Good credit score: Both your personal and business credit score will be checked. The minimum credit score for business lending is around 400.
Let's get started! Get a business loan quoteSee if you qualify
How much can you borrow with a line of credit?
Businesses can borrow between $5,000 and $250,000 on a line of credit. According to Lend proprietary data, the median amount for a business line of credit in Australia is $40,000. Lenders determine your credit limit based on your business’ gross revenue and cashflow.
Credit limits and how they're calculated vary from lender to lender. For example, one lender may cap your credit limit at a percentage of your gross revenue (money from sales), whereas another lender may determine it based on your cashflow (money going in and out of the business).
When getting a line of credit from a bank, you may need to offer an asset as collateral, such as residential or commercial property or equipment. Non-bank lenders are more flexible and can issue an unsecured line of credit, usually up to $50,000. Beyond this amount, they will generally require some form of collateral.
Business line of credit fees
Some lenders charge a one-off application fee. This is usually based on the approved credit limit. For example, you may need to pay 0.50% to 3% of your approved credit limit. So, for a $50,000 limit, the application fee would be anywhere from $250 to $1,500.
Line of credit facilities usually come with a monthly service or account fee to keep your line of credit open. Line of credit fees typically range between $10 to $35 per month, although this changes between lenders. The monthly fee is payable regardless of whether you use your funds or not. When comparing lenders, it's always best to check the comparison rate, including the interest rate and fees combined. Use our business line of credit calculator.
When to use a business line of credit?
You can use a business line of credit for any genuine business expenses. According to proprietary Lend data, the most common purposes businesses use a line of credit in 2023 include:
- Access to working capital: 60%
- Fund expansions/renovations: 15%
- Start a business: 10%
Who’s a business line of credit suitable for?
A business line of credit is suitable for any small-to-medium enterprises (SMEs) with cashflow fluctuations, seasonal income or who offer payment terms to customers but need funds to cover immediate expenses. Businesses can use a line of credit for instant access to capital to cover day-to-day expenses or cover larger business expenses like buying inventory or repairing equipment.
How to apply for a business line of credit
The application process for a line of credit is the same as with any other business finance. You’ll need to submit some financial documentation and information about your business.
1. Supporting documents
Lenders will ask for financial documents to get a snapshot of your business revenue and cashflow. They will ask for:
- Bank statements from the last six to 12 months
- Business registration and tax information (e.g. BAS statements, tax returns)
- Identification documents (e.g. driver’s licence, passport)
2. Your business information
Lenders will also look at your business profile and history. Think of it like a compatibility test. They will want to know how long you’ve been trading, how your business is structured (i.e. whether it’s a company, partnership or sole trading business), the industry you operate in, etc.
Non-bank lenders will generally assess your business within hours by reviewing your bank statements and verifying who you are against online bureaus like Equifax and CreditorWatch. Alternatively, speak to a broker about how to get a business loan.
How does a business line of credit compare to other business loans?
A small business loan is a one-time lump sum you repay in instalments with interest over time. On the other hand, a line of credit gives you access to a pool of funds, and you only pay interest on the amount you access from that pool. You can borrow from the same pool indefinitely as long as you repay the balance. That’s why it’s sometimes referred to as an evergreen loan.
|Interest rate range
|Secured business loan
|Credit & ID check
6-12 months in business
Collateral (e.g. property)
|Unsecured business loan
|Credit & ID check
6-12 months in business
|Business line of credit
|Credit & ID check
Good credit score
6-12 months in business
|10-15% p.a. on what you draw
|Merchant cash advance
6+ months in business
Minimum monthly card sales
|10-20% of daily card sales
FAQs about business lines of credit
Do I need a deposit to get a business line of credit?
No, you don’t need a deposit for a business line of credit. However, you can generally get lower interest rates and more flexible terms with a secured line of credit where an asset like property is used as collateral.
Can I apply for a business line of credit if I have a bad credit history?
You may still be able to get a line of credit if your credit history isn’t perfect. You may initially only qualify for a credit line secured against residential property or be asked to provide a personal guarantee. Personally-guaranteed credit makes you personally liable for the debt. You could alternatively apply for a bad credit business loan.
What’s the difference between a business line of credit and a business overdraft?
The main difference is that a business line of credit is a finance product separate from your bank account (like a loan). A business overdraft is typically attached to a business transaction account and can only be accessed once your account goes into the red.
Can I use a business line of credit to pay off other debts?
Yes, you can use a business line of credit to consolidate or refinance other cashflow debts. You can’t use it for repaying debt in arrears.
What’s the difference between a business line of credit and a business credit card?
There are a few differences between a business line of credit and a business credit card. Firstly, you can use line of credit funds for any legitimate business expense, including paying vendors or employees. In contrast, you can't charge payroll or contract payments to a credit card. Secondly, a business line of credit has lower interest rates and a higher credit limit than a business credit card. On the other hand, business credit cards come with interest-free days and rewards on purchases, whereas business lines of credit don't.
1. Proprietary data of small businesses who applied for a line of credit through Lend.com.au and have been operating for at least five years (2023).