A Business Line of Credit for the Lumpy Months

How a business line of credit works

A business line of credit is a facility with an approved limit. The business draws money when it needs it, pays it back when cash comes in, and can draw again without a new application. Interest is charged on the balance you are using, not on the whole limit.

It is built for money that goes out and comes back: stock bought ahead of a busy season, wages before a big client pays, a supplier deal that needs cash this week. It is a poor fit for paying off a long-lived asset over years, because nothing forces the balance down. That job belongs to a term loan or equipment finance.

Who a line of credit suits

What lenders look at

Trading history

Most lenders want at least 12 months of trading, and the larger limits usually need two years or more. Newer businesses can still get a smaller limit, generally at a higher rate.

Bank statements and turnover

The limit is often set against turnover and how money moves through the account. Steady deposits help. Dishonours and an account that sits at its limit do not.

Financials and the ATO

Larger facilities ask for financials, tax returns and BAS. An unpaid tax debt with no payment plan in place is one of the fastest ways to a no.

Security

An unsecured line relies on the business and a director's guarantee. A secured line is usually backed by property, which lifts the limit and lowers the rate but puts that property on the line.

The directors

Personal credit files are checked, and most small business facilities need a personal guarantee from the directors.

Typical terms

Common ranges, not promises. Every lender sets its own policy.

• Limit: from a few thousand dollars on smaller unsecured lines to six figures and more with property behind it.
• Interest: charged only on the drawn balance, usually calculated daily and debited monthly.
• Fees: an establishment fee is common, and many lines also carry a line fee or facility fee on the full limit. Some charge a fee each time you draw instead.
• Repayments: some lines only ask for the interest each month, others need a set portion of the balance repaid. Check which one you are signing.
• Term: most are ongoing facilities reviewed every year or so rather than loans with an end date. Some unsecured lines run for a fixed period and then need renewing.
• Access: once the line is set up, drawing on it is usually quick, often the same or next business day depending on the lender.

An example

Line of credit, overdraft or term loan?

What to have ready

• ABN, company details and the directors' details
• Six to twelve months of business bank statements
• Recent BAS, plus financials or tax returns for larger limits
• A rough idea of the limit you need and what it is for
• Property details if you are looking at a secured line
• A list of current business debts and their repayments
• Your ATO account position, including any payment plan in place

Line of credit questions

Looking at something else? See business term loans for a one-off amount, invoice and debtor finance if the gap is unpaid invoices, the equipment line of credit for regular machinery purchases, or business loans for the full picture.