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Business Line of Credit vs Business Loan

Written by

Shaun McGowan

A business line of credit is a type of 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Unlike a business loan, you only pay interest on the amount withdrawn at one time, however a LOC may also include high monthly fees.

Key Features

  • Borrow from $5,000 to $500,000
  • Fixed or variable interest rates
  • Repayments to suit your budget
  • Terms from one month to five years
  • Secured & unsecured options
Why businesses seek finance

Who is eligible?

  • Own a business and have an ABN
  • Business is GST-registered
  • Permanent Citizenship or Residency
  • Minimum business-operating time of six months
  • Can provide business bank statements
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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 access an agreed credit limit and only accrue interest charges if and when an amount is drawn. A revolving LOC allows a business to draw, repay, and redraw funds once their initial application is approved.

There are generally two options available:

  1. A lower rate securitised product
  2. An unsecured business line of credit

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.

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How to use a Business Line of Credit?

Unlike a loan, when you withdraw funds using your LOC, you’ll pay interest only on the amount you’ve withdrawn, not the total line of credit amount available.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.

How to use a business line of credit

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 CreditAmount withdrawnAmount accruing interestRemaining credit

$100,000

$100,000

$100,000

$0

$100,000

$25,000

$25,000

$75,000

Secured Line of Credit

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.

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Rates and amounts

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.

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)

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Business Line of Credit with low fees

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.

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

LOC Line Fees

Line of credit amountLine fee (%)Monthly line fee ($)

$200,000

0.50%

$1,000

$200,000

2.00%

$4,000

Business LOC application fees

Credit amountApplication fee (%)Application fee ($)

$50,000

0.50%

$250

$50,000

2.00%

$1,000

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

If you’re interested in applying, you should be able to speak to either your bank, or a number of online, specialist business loan lenders. Alternatively, you may wish to speak with a finance broker if you require assistance with your application.

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How to qualify and apply

You can apply for a small business loan with banks or specialist online lenders.

Specialist lenders are well-known for providing fast approval. If you choose to apply with a specialist lender, you can apply online and often be approved the same day, as these types of lenders will only require your business bank statements to assess your ability to repay the loan amount.

How to qualify for a loan in Australia

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.

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 including profit and loss statements and your balance sheet (provided by your accountant) A business plan stating how you will use the funds.

If you'd like to apply online and compare options from various Australian lenders, you can use the Money smart form to instantly see details on real line of credit offers, compare deals, and apply direct.

Here are the most popular business line of credit (LOC) questions people are asking:

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.

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.

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%.

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.

Revolving facility

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 a draw down works

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About the Author

Shaun McGowan from money.com.au

Shaun

McGowan

Shaun McGowan

Shaun is the founder of Money.com.au and is determined to help people pay as little as possible for financial products. Through education and building world class technology. Previously Shaun co-founded CarLoans.com.au and Lend.