How a line of credit works
How to apply
Borrowing Limits and Fees
What is a Business Line of Credit?
A business line of credit - also called LOC - is a type of business finance that allows a business to withdraw an agreed amount of funds when it needs to. Interest is only applied to the amount withdrawn by the business. A revolving LOC allows a business to draw, repay, and redraw funds once their initial application is approved.
There are generally two options available:
- A lower rate securitised product
- An unsecured business line of credit
How does a Business Line of Credit work?
You get an agreed line of credit, which you can use to access funds when you choose, without needing approval from your lender or applying again. Unlike a loan, when you withdraw funds using your LOC, you’ll pay interest only on the amount you’ve withdrawn, not the total line of credit amount available. This can reduce the amount of interest your business will pay over time.
You can still withdraw the remaining amount up to the agreed limit, including any funds you have repaid.
In the table below, you’ll see how a business line of credit works.
In the first example:
- A business is extended LOC to the amount of $100,000
- The business withdraws $100,000
- The amount accruing interest is $100,000
In the second example:
- A business is extended LOC to the amount of $100,000
- The business withdraws $25,000
- The amount accruing interest is $25,000
How a Business Line of Credit Works
|Line of Credit||Amount Withdrawn||Amount accruing Interest||Remaining LOC|
A business line of credit can be offered to you as a revolving facility, which allows you to draw, repay, and redraw the funds as often as you like within a set period.
How do I apply?
A business line of credit is available secured or unsecured from both banks and non-bank lenders. Unlike a secured line of credit, an unsecured line of credit means you do not have to tie up any collateral or assets as security against the funds borrowed. Some lenders may only offer a secured LOC, so research and compare lenders to find the best one for you.
If you’re interested in applying, you should be able to speak to:
- Your bank
- Non-bank lenders
- A finance broker
You can apply for a Business Line of Credit online with a number of specialist lenders. You can see how each business finance lender compares in our reviews below:
If you’d like to see a full list of business loan lenders in Australia and learn how to compare various offers, you can visit our Lender Reviews section.
Business LOC Lender Comparison
A LOC can be secured - if you have assets to offer as collateral this can lower the rate applied to your borrowed funds, but you will not be able to sell these until after your LOC is closed.
Who can get a Business Line of Credit?
Eligibility for a business LOC will depend on the lender. Banks will often only offer a line of credit to established businesses with a strong trading history. However, LOCs issued from non-bank lenders are increasingly popular with all types of businesses, as these lenders often have simplified approval criteria and can offer faster approval than banks.
Qualifying is relatively simple if you have:
- Been trading for at least 6 months; and
- Have an ABN (Australian Business Number); and
- Are registered for GST.
Credit facilities are popular with business owners who:
- Want fast, flexible access to cash
- Do not want the risk of being locked into long-term debt
- Do not want to pay interest on funds that they aren’t using
A business line of credit will often require set-up and ongoing maintenance fees. Check your lender’s terms before applying to ensure you aren’t paying more than your business can afford to.
What is the Business Line of Credit process?
To apply for a Line of Credit, you’ll need to provide a lender will sufficient business documentation to make an assessment. This might include details about how long your business has been operating, your monthly revenue, or other information depending on the individual lender’s approval criteria.
Here’s what you may need to provide to a lender when applying for a business line of credit:
- Proof of identity
- An ABN and GST registration
- An acceptable credit rating - the lender will ask to conduct a credit check
- Business bank statements
- Trust Deed if the business is held in a trust
- Australian Tax Office (ATO) Portal access
- Financial records (provided by your accountant)
- Profit and Loss Statements
- Balance Sheet
- A business plan stating how you will use the funds.
Some lenders will offer low doc (i.e. limited documentation) line of credit options and a faster application approval process. This type of LOC can be beneficial to a small business requiring fast access to cash, but will often include higher interest rates.
How much can I borrow with a Business Line of Credit?
A business line of credit can range from $5,000 up to $5,000,000. As each lender will have their own minimum and maximum limits, it’s likely that you’ll be able to fill out a pre-approval form with a lender to determine how much you are eligible for.
The amount your business can access through a LOC may also depend on:
- Whether your LOC is secured or unsecured
- The types of assets used as security (a residential property or commercial property)
- The purpose for seeking a LOC
- Your personal level of serviceability (whether you personally could meet the repayments)
Minimum and Maximum Amounts
|Product||Minimum Amount||Maximum Amount|
|Business Line of Credit||$5,000||$5,000,000|
What type of fees can I expect to pay?
A business LOC often involves a line fee. This is the fee you pay the lender to ensure they keep your LOC open and that you can always access finance when it is needed. The line fee may be represented as a percentage of the total LOC.
You can see how a line fee works in the table below, and how even a small change in the line fee percentage can make a big impact. In the first example:
- A business applies for a LOC
- It is approved for $200,000
- A line fee of 0.50% is applied to the LOC
- The monthly line fee repayments to keep the LOC open will be $1,000.00
|Line of Credit Amount||Line Fee (%)||Monthly Line Fee ($)|
A line fee is the fee you pay to ensure the funds are always available. You will still pay the monthly line fee whether you draw the funds or not, separate to any interest accrued on the amount you withdraw.
Some lenders may also 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 2% of your approved credit limit, as illustrated in the table below. In the first example:
- A business applies for a LOC
- It is approved for $50,000
- An application fee of 0.50% is applied to the LOC
- The one-time application fee is $250.00
|Line of Credit Amount||Application Fee (%)||Application Fee ($)|
On a $50,000 LOC limit the application fee could be anywhere from $250 to $1,500. However, it’s more important to compare lender interest rates and line fees on a LOC, as your application fee is only a one-time figure.
What is the term?
The general term for a business line of credit is between 3 - 36 months. However, depending on your lender, you may have access to a revolving LOC - i.e. without a maximum term. If you apply for a revolving line of credit, your lender will review the agreement at fixed intervals such as every one or two years.
Minimum and Maximum Terms
|Product||Minimum Term||Maximum Term|
|Business Line of Credit||3 months||No limit|
Even with a secured, revolving line of credit, there is no guarantee that the lender will continue to offer the LOC beyond the review date. You may want to compare LOC review terms before committing to a specific lender.
What are the interest rates?
Interest rates will vary on a business line of credit, but you’ll get a lower rate on a secured LOC than on an unsecured LOC. If you’re approved for a business LOC, your lender will set both the credit limit and interest rate applied each time you draw funds.
Secured vs Unsecured LOC comparison
|Type of LOC||Amount available||Interest Rate|
Business Line of Credit (LOC) Summary
A business line of credit is a type of short-term business finance which is similar to a business overdraft. With a line of credit, a business is given an approved amount it can borrow from a lender, which will then be available to use whenever it is needed. Unlike a business loan, you only pay interest on the amount withdrawn at one time, however a LOC may also include high monthly fees.
- Is offered by a variety of different lenders
- Can be secured or unsecured at different rates
- Allows your business to withdraw funds as needed
- Only requires you to pay interest on the withdrawn amount
- Only requires you to apply once if approved
Pros and Cons
Business Line of Credit (LOC) FAQ
Will I need to put down a deposit for a Business Line of Credit?
No, you will not need to put down a deposit on a business line of credit. You can, however, apply for a secured line of credit, which will provide a lower interest rate on any withdrawn funds by securitising the LOC with an asset, such as property.
Can I use a Business Line of Credit to replace existing business assets?
Yes, you can use a business line of credit for any legitimate business purpose. This includes purchasing new assets for your business, or replacing any existing assets.
What is the typical interest rate I can expect to pay on a Business Line of Credit?
The typical interest rate you can expect to pay on a business line of credit will be different for a secured or unsecured business LOC. On a secured LOC, interest rates will generally be between 5% - 10%, while an unsecured LOC may attract rates between 15% - 25%.
How soon can I be approved?
If you apply through non-bank lenders, it’s highly likely you can apply and be approved on the same day. Non-bank lenders will offer faster approval on applications up to $150,000 - in this instance, they may only require business bank statements to grant approval on a LOC.