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What is a business line of credit?
A business line of credit is a flexible financing option that allows you to access a predetermined amount of funds whenever you need them, up to a specified limit. Unlike a business loan, you only pay interest on the amount you borrow, not the entire credit limit.
This can be a great option for businesses that have irregular cash flows or want to be prepared for unexpected expenses.
With a revolving line of credit, you can borrow, repay, and borrow again without having to reapply each time. In that sense, it works similarly to a business credit card or a charge card.
This flexibility is one of the main reasons businesses I speak with are interested in a line of credit.
What you get with a business line of credit
- Fast, ongoing access to capital for your business
- Credit limits from $5,000 - $2 million
- Only borrow as much as you need
- Interest only charged on amounts drawn down
- More flexible than a business loan
- Some lenders don’t require security
- Interest can be fixed or variable
- Set-up and ongoing fees apply
When is a business line of credit useful?
A line of credit is particularly useful for businesses whose cash flow is irregular.
Most of the businesses we help with a line of credit use it to cover regular expenses like wages, paying invoices and buying stock.
It’s also often used as a backup source of finance to cover unexpected expenses.
A line of credit is not as suitable for large, longer-term investments like financing a business vehicle or other kinds of business assets.
How to use a business line of credit?
Unlike a loan, when you withdraw funds using your line of credit, you’ll pay interest only on the amount you’ve withdrawn, not the credit limit amount.
This can reduce the amount of interest your business will pay over time with a business line of credit.
You can withdraw the remaining amount up to the agreed limit at any time, including any funds you have already repaid.
How a business line of credit works
| Line of credit | Amount withdrawn | Amount accruing interest | Remaining credit |
|---|---|---|---|
$100,000 | $20,000 | $20,000 | $80,000 |
$100,000 | $100,000 | $100,000 | $0 |
Business line of credit case study
Let's say a business has been trading for two years and is looking to grow.
They're looking at redoing their website and doing some sign writing on their building. The total cost is going to come to around $50,000.
The advantage of having a business line of credit is you don't have to borrow all the money at once.
Say the sign-writing quote comes in at $5,000. You can take that $5,000 out of your line of credit and the provider will only charge you interest on what you've used. Once you pay that $5,000 back, the credit line reverts to the original limit.
Then two months down the track, the business decides to redo the website and some other bits and pieces. It can access the funds again through the line of credit without needing to reapply, and then repeat the process as often as needed. So the line of credit acts as a flexible credit facility for whatever the business needs.
Secured vs unsecured business line of credit: Which is best?
Secured line of credit
- Usually comes with a lower interest rate
- Can be secured by residential or commercial property, or a business asset
- You won’t be able to sell the asset used as security while the line of credit is open
Unsecured line of credit which
- Usually has a higher interest rate
- More straightforward (and faster) to access
- Like an unsecured business loan, you’re not tying up personal or business assets to act as collateral
Best business line of credit interest rates
Business line of credit interest rates vary but generally start from around 7% p.a. Here’s what the lender will consider when deciding what interest rate to charge:
- Whether the line of credit is secured or unsecured
- The types of assets used as security (a residential property or commercial property)
- Your business and personal credit score
- How long your business has been operating
Business line of credit fees
Application fee
Some (in fact, most) lenders charge a one-off application fee when you set up the line of credit. This is usually based on a percentage of the approved credit limit.
For example, you may need to pay 0.50% to 2% of your approved credit limit.
Line fees
A business line of credit also often involves a line fee. This is the ongoing fee you pay the lender to keep your credit line open so you can always access finance when it’s needed. Again, this is often a percentage of the credit limit, but some lenders charge a flat line fee per month or quarter. As you’ll see below, even a small difference in the line fee percentage in particular can have a big impact on how much you’ll end up paying.
Business line of credit fee examples
| Line of credit amount | Application fee | Monthly line fee (%) |
|---|---|---|
$50,000 | 2.00% = $1,000 | 1.00% = $500 |
$200,000 | 1.00% = $2,000 | 0.50% = $1,000 |
Who is eligible for a business line of credit?
Here’s what’s generally required to be eligible for a business line of credit:
- You own a business with an ABN and is GST-registered
- You’re an Australian citizen or permanent resident
- The business has been operating for at least six months
- You can provide business bank statements
- Monthly business revenue is above lender’s cut off
- Your credit score is above the lender’s cut off
How to apply for a business line of credit
You can apply for a small business line of credit with banks or specialist online lenders. Specialist lenders are known for providing fast approval. In fact, you can apply online and often be approved the same day.
To apply for a line of credit, you’ll need to provide a lender with sufficient business and personal documentation to prove your eligibility and ability to repay any funds you borrow. This could include:
1
Proof of identity
2
Proof of ABN and GST registration
3
Business bank statements
4
Trust Deed if the business is held in a trust
5
Tax returns
6
Financial records including profit and loss statements and your balance sheet (provided by your accountant)
7
A business plan stating how you will use the funds
Line of credit vs business loan vs credit card
| Business line of credit | Business loan | Business credit card | |
|---|---|---|---|
Amount | $5,000 - $500,000 | Up to $1 million | Up to $80,000 |
Term | Ongoing | 1 month - 5 years | Ongoing |
Interest charged | On amount drawn down | On remaining balance | On balance owing after interest-free period |
Fees | Upfront and ongoing | Upfront and ongoing | Upfront and ongoing |
Security | Secured or unsecured | Secured or unsecured | Unsecured |
Rewards | No | No | Yes |
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