Business finance
Business line of credit
A line of credit is an approved limit your business can draw against when it needs to, repay, and draw against again. You are generally charged on what you have actually drawn rather than on the full limit, which is what makes it suit an irregular need.
It is the usual answer when the problem is not one particular purchase but a recurring gap you cannot time precisely.
What it is
A revolving facility, in the same family as an overdraft. Once the limit is in place you can use it without going back for a new approval each time, which is the practical advantage over a term loan when needs arrive at short notice.
Facilities are commonly reviewed periodically, and a lender can change or withdraw a limit under the terms you agree to. It is worth understanding those review terms before you rely on the facility as permanent.
How it usually works
You apply once for a limit. After that, drawing down is usually a transfer rather than an application. Repayments are commonly interest on the drawn balance plus whatever you choose to pay down, though structures differ between lenders.
Some lines are secured against property or another asset and some are not. Secured facilities generally come with different terms from unsecured ones, and which is available to you depends on your position and on the lender.
What lenders look at
Because the lender is committing to a limit it cannot predict the use of, assessment tends to lean on the stability of the business rather than on a single transaction.
- Trading history and how long the ABN has been active
- Turnover and how predictable it is month to month
- How the business has handled existing facilities
- Whether property or another asset is available as security
- Credit history, including any recent defaults
- Existing commitments against the same cash flow
When it tends to suit
- Costs that arrive at unpredictable times rather than on a schedule
- A business with seasonal peaks and troughs it knows well
- Holding capacity in reserve for an opportunity you cannot yet time
- Smoothing the gap when customers routinely pay late
- Avoiding a fresh application every time a short gap appears
Common questions
Is this the same as an overdraft?
They work similarly, and the words are often used interchangeably. An overdraft is usually attached to a transaction account, while a line of credit is more often a separate facility. What matters more than the label is the terms, the review conditions and what security is required.
Am I charged if I do not use it?
That depends entirely on the lender and the facility. Some charge a fee to keep a limit available whether or not it is drawn. Ask the specialist to be specific about this before you commit, because it varies.
Can the limit be reduced later?
Facilities are generally subject to review and a lender can change or withdraw a limit under the terms of the agreement. Read those terms, and ask what would trigger a review.
Related finance types
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