Business line of credit, compared with an overdraft, a card and a loan

A line of credit is the closest thing in business finance to a safety net that you can also use as a tool. It sits ready, gets used when needed and costs comparatively little when it isn’t drawn. But it isn’t the only flexible option, and it isn’t always the cheapest. Here’s how it measures up.

How does a business line of credit work?

The lender approves a limit. You draw funds when you need them, usually by transfer into your business account. You repay when cash comes back in, and the available amount goes back up. Interest is generally charged only on the drawn balance, though there may also be:

• An establishment fee to set it up.
• A line fee or limit fee, charged on the full limit.
• Monthly account-keeping fees.
• Minimum repayment requirements.

How does it compare with the other flexible options?

	Line of credit	Overdraft	Business credit card	Term loan
Where it sits	Separate facility	Your transaction account	Card account	Lump sum paid out
Typical size	Medium to large	Small to medium	Smaller	Any
You pay for	Drawn amount plus fees	Overdrawn amount plus fees	Balance after any free period	Whole balance
Repayment	Flexible, minimums apply	Flexible	Monthly minimum	Scheduled
Best for	Recurring gaps	Short dips	Small purchases, travel	One-off projects
Main risk	Never clearing the balance	Limit reviews	High cost on carried balances	Paying on money not yet needed

Who benefits most from a line of credit?

A credit line earns its keep when the need repeats or is unpredictable:

• Seasonal businesses: retail, tourism, agriculture, hospitality.
• Project-based businesses: builders and trades paying for materials before progress claims.
• Importers paying suppliers before goods sell.
• Businesses with uneven months, where some months are strong and others thin.

If the need is one large purchase, a term loan gives you certainty and a clear end date. If the gap is caused by customers paying slowly, invoice finance can scale with sales in a way a fixed limit can’t.

How much limit do you need?

Pick the limit from your history, not from a guess:

1. Look at the last 12 months of bank statements.
2. Find the lowest point the account reached, and how long it stayed low.
3. Add a buffer for one bad month.

That figure is the limit to ask for. A much bigger limit costs more in line fees and may make the facility harder to get approved.

Illustrative example. A Hobart builder pays for timber, plasterboard and subcontractors before each progress claim is paid. Looking back over a year, the account dipped by up to $85,000 for about three weeks at a time. A $100,000 line of credit covers that with a buffer. He draws before each stage and repays when the claim lands, so most of the year the balance sits near zero and his costs are mostly the line fee.

What can go wrong?

• The balance never comes back down. A line drawn to the limit for a year has become a term loan with worse terms. Set a habit of clearing it after each cycle.
• The limit gets reviewed. If trading weakens, some lenders reduce limits at review. Read how reviews work.
• Fees pile up. Line, account and establishment fees add to the true cost. See our fees page.

How should you compare line of credit offers?

• Total cost under a realistic pattern of drawing and repaying.
• Line or limit fees, and whether they’re charged on the full limit.
• Minimum monthly repayments.
• Review, reduction and cancellation terms.
• Security: unsecured, property-backed or a general security interest.

The repayments comparison page shows how flexible and fixed repayment styles suit different cash flow patterns.

How do you keep a line of credit working for you?

A credit line stays useful only if it’s used the way it was meant to be:

• Draw for a reason, such as a stock run or a gap between progress claims, not for general spending.
• Repay when the cash comes back, so the balance returns towards zero.
• Review the limit each year. If you never use more than half, a smaller limit may cost less in fees.
• Don’t fund long-lived assets from it; put those on equipment finance or a term loan.

A quick check every quarter is enough: if the balance hasn’t been near zero in three months, it’s becoming permanent debt.

See whether a credit line fits your cash flow

If the same squeeze comes back every few months, it’s worth seeing what limit your trading could support. Asking doesn’t touch your credit file; a check only happens once you decide to proceed. We don’t pass your enquiry around a crowd of lenders. A real person looks at your statements and the pattern of your gaps, then compares a credit line with a short loan or invoice finance in plain dollars.

Please be accurate on the form about turnover and any existing facilities. Start your enquiry, or rank the options for your situation with the comparison tool and then ask us to compare limits.