Working capital
How a business line of credit works.
Key takeaways
- Revolving. You pay interest only on what's drawn, not the full limit.
- Rates typically 14% to 25% p.a., depending on lender tier and whether the facility is secured (backed by an asset the lender can claim if repayments stop).
- Usually reviewed and renewed annually. No fixed end date like a term loan.
- Comparing lenders first helps you avoid high undrawn-limit or facility fees.
What Is a Business Line of Credit?
A business line of credit is a revolving facility: the lender sets a limit - say $150,000 - and you draw against it whenever you need cash, up to that ceiling. As you repay drawn funds, the limit frees up again for future use, the same way a credit card works but sized and priced for business cash flow rather than everyday spending.
Interest is calculated daily on the drawn balance only, not on the full limit. If you draw $40,000 against a $150,000 facility for three weeks and repay it, you pay interest for those three weeks on $40,000 - nothing more. That mechanic is what makes a line of credit suited to irregular or seasonal cash flow: stock purchases, payroll gaps between invoice cycles, or materials costs that spike ahead of a job starting. Most lenders charge a smaller ongoing fee on the undrawn portion of the limit to keep it available, separate from the interest charged on what's actually drawn.
Revolving vs. Term - Line of Credit vs. Term Loan vs. Overdraft
| Product | Facility Type | Interest Basis | Best Use Case |
|---|---|---|---|
| Line of Credit | Revolving, redraw as repaid | Daily interest on drawn balance only | Ongoing or seasonal working capital |
| Term Loan | Lump sum, fixed schedule | Interest on full balance from day one | One-off purchase or expansion |
| Overdraft | Buffer on transaction account | Interest on the negative balance only | Short, occasional cash flow dips |
Rate Benchmarks by Lender Tier (2026)
Line of credit facilities generally price a few points above an equivalent secured term loan from the same lender - the revolving structure and the undrawn limit the lender has to keep available both add risk the rate has to cover.
| Lender Tier | Rate Range (p.a.) |
|---|---|
| Major Banks | From about 11% |
| Second-Tier Banks | 14% to 16% |
| Fintech Lenders | 14% to 32% |
| Specialist Non-Bank | 14% to 20% |
| Private Lenders | 20% to 40% |
Indicative market ranges, not quotes. Your Compare Report shows the options you qualify for across our panel.
What You Actually Pay: Drawn Balance vs. Full Limit
The gap between a line of credit and a term loan of the same nominal size comes down to what interest is charged against. Worked example: a $200,000 facility, averaging $60,000 drawn across the year, compared with a $200,000 term loan carrying interest on the full balance throughout.
$200K TERM LOAN
10.5% p.a.
Interest basis: full $200,000 balance
Annual interest: $21,000
Total cost: $21,000
Paid regardless of how much is used
$200K LINE OF CREDIT
14% p.a.
Interest basis: $60,000 average drawn
Interest on drawn balance: $8,400
Undrawn limit fee (0.75% on $140,000 avg): $1,050
Total cost: $9,450
Despite a higher headline rate, the line of credit costs $11,550 less over the year - because interest only applies to the $60,000 actually in use, not the full $200,000 limit sitting available.
Find out how much you'd actually pay.
See My OptionsHow Much Can You Draw?
Limits are sized against serviceability (your ability to repay based on cash flow) if the facility were fully drawn, rather than the amount requested alone. Lenders weigh six factors:
- Annual Revenue
- Unsecured limits are typically around two times monthly revenue.
- Security Offered
- Property or asset backing raises the ceiling and improves the rate on the drawn balance.
- Time in Business
- 12+ months trading opens the full panel; under 6 months narrows it to specialist lenders.
- Cash Flow Trend
- Lenders read 3 to 6 months of statements for how often the account dips, rather than average balance on its own.
- Existing Debt Load
- Other facilities reduce the limit a lender will set.
- Credit Score
- A clean file broadens the panel; defaults or late payments narrow it to non-bank options.
| Security Type | Typical Limit | Basis |
|---|---|---|
| Unsecured | Up to $250,000 | Around two times monthly revenue |
| Asset-Backed | Up to $1M | Value tied to the asset offered |
| Property-Backed | $3M+ | Depends on the loan-to-value ratio (loan size against property value) |
Eligibility & Documents
Minimum eligibility varies by lender type, but most panels apply a similar baseline:
- Time Trading
- 6+ months for non-bank; 12+ months typical for bank lenders.
- Annual Revenue
- $100,000+ typical minimum across the panel.
- Credit File
- No active defaults for bank tier; non-bank options exist otherwise.
- Business Structure
- Company, trust, or sole trader; ABN active 6+ months.
| Document | Fintech / Non-Bank | Banks |
|---|---|---|
| Bank statements | 3 to 6 months | 6 to 12 months |
| Financial statements | Not always required | Required (2 years) |
| Tax returns | Rarely required | Required (2 years) |
| Identification | Director ID + licence | Director ID + licence |
Evaluating a Line of Credit on Security, Term, Amount and Rate
- Security
- Unsecured limits available up to $250k; asset or property-backed facilities unlock higher limits at lower rates.
- Term
- No fixed end date - facilities are reviewed and renewed annually rather than amortising to zero.
- Amount
- Limit sized against verified cash flow and turnover, with cost driven by average drawn balance, not the ceiling.
- Rate
- Full transparency on the drawn-balance rate, any undrawn-limit fee, and annual renewal or facility fees.
Pros & Cons of a Business Line of Credit
ADVANTAGES
- Only pay interest on funds actually drawn
- Reusable limit, no need to reapply for each draw
- Well suited to seasonal or irregular cash flow
- Funds available on short notice once the facility is in place
DISADVANTAGES
- Rates typically higher than an equivalent term loan
- Undrawn-limit fees can apply on unused capacity
- Limit subject to annual review and can be reduced
Line of Credit vs. Other Finance Products
| Line of Credit | Term Loan | Overdraft | Invoice Finance | |
|---|---|---|---|---|
| How It Works | Revolving limit, draw and redraw as needed | Lump sum, fixed schedule | Buffer attached to bank account | Advance against unpaid invoices |
| Best For | Ongoing or seasonal working capital | One-off funding need | Short-term cash flow gaps | Bridging receivables timing |
| Typical Rates | 14% to 25% p.a. | 9.9% to 48% p.a. | 14% to 20% p.a. | 1% to 3% per invoice |
| Repayment Structure | Interest on drawn balance only | Fixed instalments over term | Repaid as funds are deposited | Repaid when invoice is collected |
Frequently Asked Questions
Do I pay interest on my full limit or just what I draw?
Just what you draw. Interest is calculated daily on the drawn balance only. Most lenders also charge a smaller fee on the undrawn portion of the limit to keep it available, but this is separate from - and much lower than - the interest rate on funds you've actually used.
Can my limit be reviewed or reduced?
Yes. Most facilities are reviewed annually, and a lender can reduce the limit or not renew it if trading conditions, revenue, or your credit file have deteriorated since it was set. This is different to a term loan, where the amount is locked in for the life of the loan.
Is a line of credit better than an overdraft?
It depends on the size and predictability of what you need. A line of credit typically offers a larger limit and is arranged as its own standalone facility, while an overdraft sits on your existing transaction account and suits smaller, occasional buffers. For sizeable, planned working capital needs, a line of credit is usually the better fit.
How is a line of credit different to a credit card?
Structurally similar - both are revolving, both charge interest on the balance used - but a business line of credit is sized for larger working capital needs and is assessed against business cash flow rather than a personal spending limit.
Can I use a line of credit for anything?
Most lenders don't restrict use once the facility is in place, though it's intended for working capital - stock, materials, payroll timing, and short-term cash flow gaps - rather than large one-off asset purchases, which are usually better suited to a term loan or equipment finance.
What happens if I don't use the facility?
You'll typically still pay an undrawn-limit fee to keep the facility available, though this is a fraction of the drawn-balance interest rate. Some lenders waive this fee below a minimum utilisation threshold - worth checking when comparing offers.
How often is the facility renewed?
Most business lines of credit are reviewed and renewed annually. The lender reassesses revenue, cash flow, and credit file at each review, and may adjust the limit, rate, or fees based on how the business has performed since the last review.
Will I need to provide a personal guarantee?
Most lenders require a director's guarantee, regardless of whether the facility is secured against business assets or property. It's a guarantee tied to the director personally, separate from any collateral offered on the facility itself.
How we’re paid
You don’t pay to compare. Lenders pay us.
How do we get paid?
Comparing costs you nothing. Not comparing can cost you plenty.
The headline rate rarely tells the whole story. Fees, charges and loan terms can add far more to what you repay. That’s why your Compare Report shows every cost we can identify side by side.
In most cases, the lender pays us, and only if you decide to proceed with their product offer. For more complex deals, or where the lender pays us little or nothing, we may charge a fee for our service. It doesn’t happen often, but when it does, it’s shown on your Compare Report and we’ll walk you through it before you decide.
No obligation to proceed, ever.
See the line of credit options that fit your business.
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