Business line of credit for purchases that never stop

Some purchases happen once. Others happen every week: flour and butter for a bakery, timber for a builder, fresh stock for a shop. A business line of credit is designed for the second kind. You get an approved limit, draw on it when an invoice lands, pay it back when customers pay you, and do it all again next month.

How does a business line of credit work?

Think of it as a pool of money with a ceiling. You draw down what you need, interest or charges apply to the drawn balance, and every dollar you repay becomes available again. Most lines have:

• A limit. The maximum you can have drawn at any time.
• A review date. Lenders check in, often yearly, and can raise, hold or lower the limit.
• Charges. Usually on the amount drawn, sometimes with a line fee on the whole limit. Ask for the total cost of a typical year of use.
• A guarantee. Directors normally guarantee the facility.

For trading businesses without property, limits are sized on turnover and the behaviour of the bank account. Where larger limits are needed, property security can lift them.

Which purchases suit a line of credit?

A line of credit earns its keep when spending and income don’t line up in time. Here’s how it compares with a one-off loan:

Situation	Line of credit	Term loan
Monthly stock or materials	Strong fit	Awkward: you’d need a new loan every month
Wages before a big client pays	Strong fit	Possible but clunky
Seasonal build-up before Christmas or summer	Good fit if it clears after the season	Good fit if it won’t clear for a year
A $90,000 machine	Poor fit: ties up the limit for years	Better fit, or equipment finance
Buying another business	Poor fit	Better fit, often secured

The government’s Payment Times Reporting Regulator reports that about 70 per cent of small business invoices to large businesses are paid within 30 days, which leaves a sizeable share that take longer. If you supply bigger companies, a line can bridge the wait without a new application each time.

How much should the limit be?

Lenders will tell you what they’re willing to approve. A better question is what you actually need. A quick way to work it out:

1. Add up a normal month of purchases that you pay before you’re paid.
2. Work out the gap in weeks between paying suppliers and receiving customer money.
3. Multiply monthly purchases by the gap in months, then add a modest buffer for a slow month.

Illustrative example. A bakery supplying cafés across Adelaide buys about $28,000 of ingredients and packaging a month and gets paid by most customers within five weeks. The working gap is a bit over one month of purchases, so a limit around $35,000 to $40,000 covers it with room for the Christmas rush. A $150,000 limit would only invite the line to fund things it shouldn’t.

If the gap keeps growing, have a look at working capital loans or talk to us about tightening debtor days before you raise the limit.

How do you keep a line of credit healthy?

A line of credit should breathe in and out. Signs it’s being used well:

• The balance falls after customers pay, and rises again when you restock.
• It’s mostly used for the things that generate the next sale.
• You can name what each big draw was for.

Signs it needs attention:

• The balance hasn’t dropped in months.
• It’s covering losses rather than timing gaps.
• It’s paying for long-life assets or another loan’s repayments.

When that happens, moving the stuck part into a term loan with an end date, sized against a clear costs comparison, usually restores breathing room.

What do lenders need to set up a line?

Usually less than you’d expect for a smaller limit: recent business bank statements, ABN and director details, and a picture of your regular purchasing cycle. Larger or secured limits need more, including financials or property details.

Line of credit or overdraft?

The two are close cousins, and some lenders use the names interchangeably. The practical differences usually come down to:

• Where it sits. An overdraft is attached to your everyday transaction account; a line of credit is often a separate facility you draw from.
• Who offers it. Overdrafts are mostly a bank product, often secured. Non-bank lenders more commonly offer lines of credit sized on turnover.
• How it’s reviewed. Both are usually reviewed periodically, and limits can be reduced.

Either can work. What matters is the limit, the total cost of a typical year’s use, how easily you can draw and repay, and what happens at review time.

Want a limit that matches the way you buy?

If you’re paying suppliers before customers pay you, a line of credit can take the stress out of every month. Enquiring with us doesn’t touch your credit file; a check is only on the table once you choose to go ahead. We won’t send your enquiry to a crowd of lenders. A real person looks at how your business buys and gets paid, then calls you to talk through a sensible limit.

The more accurate your form answers, especially monthly turnover and what you buy each month, the more useful that first call will be. Check your line of credit options.