Key takeaways

• What it is: A business line of credit is an approved limit you draw on when cash dips and repay as revenue arrives, paying interest only on what you use.
• Where it fits: Seasonal troughs, slow-paying customers, and the general timing mismatch between outgoings and income. Unsecured options exist for businesses with around six months or more of trading history.
• The costs to understand: Interest on drawn funds is only part of the picture. Line or facility fees on the approved limit, and establishment costs, apply whether you draw or not.
• The structural details: Facilities can be reviewed, limits adjusted, and personal guarantees are common on unsecured limits, so the terms matter as much as the rate.
• Getting it right: Sizing the limit to your real cash cycle and matching the lender to your pattern of use is broker work, done before you sign rather than after.

A line of credit is the most flexible facility in business lending, and flexibility is exactly why it needs to be set up well. The same product that smooths a seasonal trough for one business quietly costs another thousands a year in fees on a limit it never draws. The difference is rarely the product. It is whether the limit, the structure, and the lender were matched to how the business actually trades. This guide covers what a line of credit really involves, what it costs, and how to get one that fits.

What a line of credit does that a loan cannot

A term loan hands you a lump sum and a repayment schedule. A line of credit hands you a limit. You draw when the quarter is lean, repay when invoices land, and draw again next cycle without reapplying. Interest is charged only on the drawn balance, so the facility can sit at zero for months and cost you only its holding fees. For businesses whose problem is timing rather than a one-off purchase, that shape fits in a way a loan never will.

The timing problem is widespread and measurable. The Payment Times Reporting Regulator found the average time for a large business to pay 95% of its small suppliers stretched to 64 days in the latest reporting period, up from 58. Wages, rent, and super do not wait 64 days. A line of credit is the standing bridge across that gap, and it is why the facility belongs to the same family as working capital finance, where lines of credit, overdrafts, and debtor facilities are matched to a business's specific cash flow cycle.

What it really costs

The advertised interest rate is the cost of drawing. It is not the cost of the facility. A properly informed decision prices all of it:

• Interest on drawn funds: Charged daily on the balance you are using. Unsecured facilities price higher than secured ones because the lender carries more risk.
• Line or facility fees: Many lenders charge a fee on the approved limit itself, monthly or annually, whether you draw or not. On an oversized limit this is pure waste, which is why sizing matters so much.
• Establishment and review costs: Setup fees apply at the start, and some facilities carry periodic review or renewal fees over their life.
• The structure around the money: Facilities are typically subject to lender review, limits can be adjusted, and personal guarantees are common on unsecured limits. None of this should surprise you after signing, because all of it should be set out before.

These are exactly the points where lenders differ most, and the Reserve Bank's research on small business finance confirms the market has widened: specialist and non-bank lenders have gained ground, unsecured options have improved, and competition has sharpened pricing. A wider market is good news, but it is also more homework, and comparing line fees, review terms, and guarantee positions across dozens of lenders is precisely the work a broker does on your behalf.

Sizing the limit to your real cycle

The single most common setup mistake is picking a round number. The right limit comes from your cash flow pattern: the depth of your worst seasonal trough, the size of your debtor book at its slowest, and how long the gap between paying and being paid actually runs. Too small and the facility fails exactly when you need it. Too large and you pay holding fees on headroom you never touch. A broker builds the limit from your numbers, then matches the lender: some suit businesses that draw briefly and often, others suit deeper seasonal draws held for months, and pairing the pattern to the lender is where much of the saving hides. For gaps tied to a specific driver, such as stock purchases, a dedicated structure like cash flow finance may sit alongside or replace the line, and that choice is part of the same conversation.

A realistic scenario

Take a Gold Coast landscaping and maintenance business turning over $1.8 million, strong from spring to autumn and thin through winter, with commercial clients on 45 to 60 day terms. Every July the pattern repeats: wages and equipment costs run weekly while the invoice book crawls, the director tips in personal funds, and by September the business is whole again. The cost of that annual scramble is invisible but real: deferred hiring, delayed equipment replacement, and a director who cannot take a wage for two months.

Their broker maps the cycle and lands on a $120,000 unsecured line of credit: deep enough to cover the winter trough with margin, small enough that holding fees stay proportionate, with a lender whose pricing suits a facility drawn hard for one quarter and idle for three. The guarantee position and review terms are negotiated and explained before signing. The following winter the business draws down through July and August, repays through October, and the facility sits ready, not touched again until it is needed. The scramble is gone, and so is the director's second mortgage on the conversation.

What matters most

A line of credit earns its keep when the limit mirrors your real cash cycle, the fee structure suits how often you draw, and the lender's terms hold no surprises. All three are set before you sign, which is why the setup conversation matters more than the headline rate. Bring your seasonal pattern and your debtor terms to a broker, let them size the limit and compare the market, and the facility becomes what it should be: quiet, ready, and priced for the way you actually trade.

This article is general information only and does not take your circumstances into account. Consider your own situation, and seek advice where needed, before acting on it.

Want a line of credit sized to your cash cycle, not a round number? Compare working capital facilities with a broker here.