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What is a business line of credit?
A business line of credit offers quick access to credit up to a specified limit whenever a business needs it. Unlike a business loan, you only pay interest on the amount you use, not the entire credit limit.
A business line of credit 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 are interested in a line of credit, particularly during uncertain economic times when businesses may be reluctant to commit to a fully-funded term loan.
What you get with a business line of credit:
- Fast, ongoing access to capital for your business
- Credit limits from $2,000 - $2 million
- Only borrow as much as you need
- Interest rates starting from 14.35% p.a.
- Interest only charged on amounts drawn down (similar to a business overdraft)
- More flexible than a business loan
- Some lenders don’t require security
- Set-up and ongoing fees apply
Borrowing for day-to-day working capital is the second most common reason (after purchasing a vehicle) that businesses take out business finance, accounting for 29% of all finance requests received by Money. The average finance amount is just over $75,500.
How a business line of credit works
When is a business line of credit useful?
A line of credit is particularly useful for businesses whose cash flow is irregular.
According to Money borrowing data, the industries that most commonly request this kind of finance are building/construction, retail and hospitality – all of which can have and seasonal and unpredictable revenue.
Most businesses that take out a business 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 generally 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a loan, when you withdraw funds using your business line of credit, you’ll pay interest only on the amount you’ve withdrawn, not the credit limit amount.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.
Andrew Beckett, Head of Broker and Third Party Distribution, Lend
"With a line of credit, you could draw down $100k today on a $100k line of credit. Then let's say you get paid by one of your clients in a week’s time, you could clear that line of credit and you've only paid interest for that small amount of time."
Andrew Beckett, Head of Broker and Third Party Distribution, Lend
Business line of credit example
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 from lender to lender, but generally start from around 14.00% 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 and in what industry
“Often lines of credit are for better quality businesses and borrowers,” explains Commercial Finance Broker, Andrew Beckett.
“So the rates you get are often cheaper, if not very comparable with the best rates that term loans would offer. The main driver of the actual rate is the borrower risk profile, and what they need the money for."
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.
Line of credit vs business loan vs credit card
Amount | |
Business line of credit | $5,000 - $2 million |
Business loan | Up to $1 million |
Business credit card | Up to $100,000 |
Term | |
Business line of credit | Ongoing |
Business loan | 1 month - 5 years |
Business credit card | Ongoing |
Interest charged | |
Business line of credit | On amount drawn down |
Business loan | On remaining balance |
Business credit card | On balance owing after interest-free period |
Fees | |
Business line of credit | Upfront and ongoing |
Business loan | Upfront and ongoing |
Business credit card | Upfront and ongoing |
Security | |
Business line of credit | Secured or unsecured |
Business loan | Secured or unsecured |
Business credit card | Almost always unsecured |
Rewards | |
Business line of credit | No |
Business loan | No |
Business credit card | Yes |
| Business line of credit | Business loan | Business credit card | |
|---|---|---|---|
Amount | $5,000 - $2 million | Up to $1 million | Up to $100,000 |
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 | Almost always unsecured |
Rewards | No | No | Yes |
How to compare lines of credit for business in 6 steps
Here are the key factors to consider when comparing business line of credit options.
1
The interest rate you’ll be paying
2
The fees that will apply (upfront and ongoing)
3
The duration of the credit line (if applicable)
4
The repayment schedule and whether it works for your cashflow situation
5
The application process (and how easy it would be to extend your line of credit if needed)
6
Your eligibility (which lenders are you compatible with)
It’s common for borrowers to choose a lender that offers a ‘patchwork’ of finance products to suit various needs. For example, a business might need an asset loan to finance a vehicle purchase, supplemented with a line of credit to cover ongoing costs. However, you can often get a better deal by using a separate specialist lender for each separate product.
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 6-12 months
- You can provide business bank account 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
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