Pros and Cons of a Line of Credit

A line of credit gives you access to an approved limit that you can draw on, repay and redraw whenever you need it. Used well, it’s one of the most flexible finance tools for businesses and property owners. Used badly, it can turn into a debt that never gets paid off.

How a line of credit works

Your lender approves a limit, usually secured against property for larger amounts. You draw what you need, interest is generally charged only on the balance used, and you can repay and redraw at any time. Business lines of credit are commonly used for cash flow, while home equity lines of credit let property owners access the equity in their home or investment property.

The pros

• Flexibility: access funds immediately without a new application each time
• Pay for what you use: interest generally applies only to the drawn balance
• Cash flow buffer: cover gaps between paying suppliers and getting paid
• Lower cost than unsecured options when secured against property

The cons

• Discipline required: without set repayments, balances can sit at the limit for years
• Interest-only by default: the debt doesn’t reduce unless you pay it down
• Fees: line fees or annual fees may apply on the full limit
• Your property is at risk if the facility is secured against it
• Limits can be reviewed: lenders may reduce a limit if your circumstances change

When it makes sense

A line of credit suits recurring, short-term needs such as seasonal stock, payroll gaps, or funding work before invoices are paid. For a one-off purchase such as equipment or a business acquisition, a term loan or equipment finance is usually a better fit. See three different business loans compared.

How a broker helps

Line of credit pricing, fees and security requirements vary a lot between lenders. We compare options across our panel and help you size the limit so it supports your business without tying up more security than you need. Learn more about working capital finance and business loans.

Frequently asked questions

What is the difference between a line of credit and an overdraft?

They work similarly: both let you draw and repay up to a limit. Overdrafts are attached to a transaction account and are often smaller and unsecured, while a line of credit is a separate facility that is often secured against property for larger limits.

Do I pay interest on the full limit?

Generally you pay interest only on the amount drawn, but many facilities charge a line fee or annual fee on the full limit.

Can a line of credit be used to buy equipment?

It can, but dedicated equipment finance is often cheaper for a long-life asset because it’s secured by the asset itself and matches the repayment term to the asset’s life.

This article is general information only and doesn’t take into account your objectives, financial situation or needs. Speak to us or your accountant before making a decision.