Written by A line of credit is a type of business finance that allows you to borrow funds in smaller chunks as you need them. You’ll be approved to borrow up to a set limit, meaning you can withdraw funds up to that limit at any time without seeking approval.
For instance, if your limit was $200,000, this could be withdrawing amounts between $5,000 and $10,000 more frequently or a single hit of $100,000 or more. It all comes down to your business and what you need.
Why compare business loans with Savvy?
You can speak with one of our specialist commercial brokers who can walk you through a range of loans to best suit your companies needs.
You can compare business loan offers, through a range of trusted lenders, maximising your chances of a great rate.
You can fill out our simple online form to generate a free business finance quote within minutes. You can also come back to it at any time.
How do I repay a line of credit?
Once you use your business’ line of credit, you can repay the outstanding balance with interest and any applicable fees. There are often no structured repayment requirements; instead, you can pay it off at a speed that suits your business, though the longer you take, the more interest you’ll be charged. Some lenders will require this to be paid within a certain timeframe, such as five years.
All of this is in contrast to standard secured or unsecured business loans, where you’ll receive a single lump sum at the start of the loan and manage its repayments over a set term of between one and seven years.
Are business lines of credit secured or unsecured?
You can apply for a secured or unsecured line of credit for your business through Savvy. Before you do that, though, it’s worth understanding the differences between these two options:
Secured lines of credit
These require an asset to be attached as collateral for the credit line, such as a vehicle, equipment or property owned by your business. As a result of this, your interest rates are likely to be lower and your business’ borrowing power may increase.
However, your security will have to meet your lender’s eligibility criteria relating to age, condition and type, meaning not all businesses will have a suitable asset. Because your lender has to assess the asset, this may also mean secured lines take longer to process.
Unsecured lines of credit
As the name suggests, these credit lines don’t require any collateral, making them more widely available to smaller businesses that may not own a suitable asset. They’re also often more straightforward to apply for. However, as mentioned, not having security means your rates will be higher and maximum borrowing power may be lower.
How much can my business borrow with a line of credit?
Business lines of credit can go up to as much as $250,000 to $300,000 when unsecured or up to $500,000 or more when secured. However, the maximum limit your business is approved for will depend on a wide range of factors, including:
- Your business’ finances: lenders will look at your business’ financial situation, such as its revenue and costs, to get an idea of how much debt it may be able to manage.
- The size of your business: you’ll be approved for a credit line that’s proportionate to your business. Smaller businesses are more likely to be approved for lower maximum limits, for instance.
- Your business’ credit score and history: businesses with stronger credit profiles and a proven track record of managing similar debts are more likely to be approved up to a higher limit.
- Whether your credit line is secured or unsecured: as discussed, secured lines of credit may boost your borrowing power (depending on the above factors and the value of your asset).
- Your lender’s borrowing limit: different lenders have different borrowing limits, so you may be able to borrow more with some than others.
How do I compare line of credit options?
When it comes to choosing your business finance deal, there’s plenty you’ll need to consider. Some of the factors to think about include:
- Interest rates
- Application/establishment fees (one-off charge based on a percentage of your credit limit)
- Line fees (charged as a percentage of your credit limit on an ongoing basis)
- Maximum and minimum limits
- Whether a maximum repayment term is required
- Business and security eligibility criteria
When you apply with Savvy, you can have all of these factors compared for you. Once you apply online, one of our expert consultants will get to work comparing options from our panel of trusted lenders to find the one that best suits your needs.
Should I just use my business credit card instead?
Credit cards are also common among businesses of all sizes, so you might be wondering how these two options are different. Let’s break it down for you:
| Business line of credit | Business credit card | |
|---|---|---|
| Credit limit | Up to $500,000+ | Up to $50,000 to $100,000 (can come with no limit for larger corporate purposes) |
| Interest rates | Lower | Higher |
| Fees | Line fees, late fees | Annual fees, cash advance fees, late fees, fees for any package deals |
| Interest-free period? | No | Yes |
| Secured or unsecured? | Either | Unsecured |
| Minimum repayments | Up to five years total (with some lenders) | 2.00% to 3.00% of your balance (depending on provider) |
| Linked rewards? | No | Yes (with some cards) |
As you can see, many business credit cards have lower borrowing limits than line of credit loans and although they can come with interest-free periods, the rates charged are generally higher. This means that they may only be suitable for expenses that you can comfortably cover within the short interest-free timeframe.
The benefits of business lines of credit
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Frequently asked questions about business lines of credit
There are several factors that will impact the cost of your line of credit, including:
- The interest rate
- The fees
- How much you withdraw
- The time it takes for you to pay it off
Yes – when borrowing for commercial purposes, you’ll be able to claim the business portion of your interest as a tax deduction. When it comes to lines of credit, this is typically 100%. However, every business is different, so you should speak with your accountant or a tax professional for more information about what you can and can’t claim.
Yes – as long as you meet the eligibility criteria set by your lender, you can still get a commercial line of credit as a sole trader. These products are designed for businesses of all sizes, including one-person operations.
Not necessarily – if your business finds itself running at a moderate loss at one point, plugging the gap with funds from a line of credit could saddle you with more high-interest debt and make the problem worse if things don’t turn around quickly. Always carefully consider the implications of borrowing and what you’re using your funds for.
A business overdraft is a type of commercial line of credit. Although they’re very similar to line of credit loans, the key difference is that overdrafts are connected to a business bank account, allowing you to withdraw funds beyond $0 up to an approved limit.
Yes – line fees are charged on an ongoing basis regardless of your outstanding balance. This fee is charged by lenders to keep the line open and running, so you’ll have to pay this whether you’re actively borrowing or not.
It may be possible in some cases to withdraw more than your approved limit. If this happens, you’ll likely be charged a hefty fee and will be required to pay the exceeding balance off as soon as possible. However, in other cases, lenders may put up safeguards to make it impossible for you to overdraw.
These products are incredibly versatile and can be used for almost any business purpose. The one condition of signing up for one of these agreements is that you must use the funds for business purposes, rather than for any private or personal reasons.
