Line of credit mistakes to avoid

A business line of credit is one of the most flexible tools in business finance. Used well, it smooths cash flow cheaply. Used badly, it becomes an expensive permanent loan that crowds out everything else. These are the mistakes we see most often.

Mistake 1: staying fully drawn

A line of credit is designed to go up and down. If yours sits at or near its limit for months, it has quietly become term debt, often at a higher cost than a term loan would be and with none of the headroom it was meant to provide. Look at the part of the balance that never comes down and consider moving it into a working capital loan or term loan.

Mistake 2: funding long-term assets

Buying a vehicle or machine on a line of credit ties up the facility for years. When the next cash gap arrives, there is nothing left to draw. Equipment finance matches the cost of the asset to its working life and keeps the line free for its real job.

Mistake 3: sizing it on a hunch

Too small, and it runs out in the first tight month. Too large, and you may pay fees on a limit you never use. Size the line from your cash flow: the lowest point in a typical quarter, the effect of a late payer and the BAS. Our guide to how at call funding works shows how.

Want a person to look at your numbers? The 60-second enquiry runs no credit check, and the person who reads it is the person who calls you back.

Mistake 4: ignoring the cost of holding it

Interest is usually charged on what you draw, but some facilities also charge a line or limit fee whether you use it or not. Compare the full cost over a year, not just the cost of drawing.

Mistake 5: covering ongoing losses

If the business loses money every month, a line of credit will be drawn steadily and never repaid. That is not a cash flow gap; it is a profitability problem. Funding it only makes the eventual fix more expensive. See when not to borrow.

Mistake 6: mixing personal and business use

Using a business line for personal expenses muddies the business’s records and can create tax and lending problems. Keep it for business purposes only.

Mistake 7: not repaying promptly

When a customer pays, repay the line straight away. Leaving the cash sitting in the transaction account while the line stays drawn costs money for no reason.

A quick health check

Question	Healthy answer
How often is the line fully repaid?	Several times a year
What is the average drawn balance?	Well below the limit
What has it been used for?	Short-term gaps
What does it cost per year in total?	Known and reasonable

Fixing a line that has gone wrong

If the line has been maxed out for a long time, the usual fix is to split it: move the stuck part into a term loan with a clear end date, and keep a smaller line for genuine swings. Where the business owns property, a property-secured loan with interest capitalised can take the pressure off while trading recovers. Compare the two tools in line of credit vs business loan.

More on this topic

• Business line of credit: A business line of credit gives you a limit to draw on and repay as cash flow moves. How it works, what it costs in practice and who it suits best.
• Line of credit vs business loan: Line of credit vs business loan: how each works, what each costs in practice and which suits recurring cash gaps versus one-off purchases.
• How at call business funding works: At call funding means capital you can reach when the business needs it. How standby facilities and lines of credit work, what they cost and how to set one up.
• Equipment finance: Equipment finance lets the business buy machinery, vehicles and tools without draining cash. How asset-secured lending works and what to check first.
• When not to borrow: Borrowing is not always the answer. The warning signs that a business loan would make things worse, and the alternatives worth considering first.

Terms used in this guide

• Line of credit: an approved limit the business can draw, repay and draw again, usually paying interest only on the drawn balance.
• Working capital: the cash a business needs to keep running while money is tied up in stock and unpaid invoices.
• BAS: the business activity statement used to report and pay GST, PAYG withholding and other amounts to the ATO.
• Capitalised interest: interest that rolls into the balance owing rather than leaving your account each month.

Before you accept an offer

• What is the full cost of this finance in dollars over the whole term?
• Can I repay early, and will that cost extra?
• Is there a fee on the unused part of the limit?
• Who needs to sign or guarantee the loan?
• What exactly triggers a default under the contract?

Who else to talk to

Before committing, run the plan past your accountant or bookkeeper. They can check that the amount matches the real need, that the repayments fit your cash flow forecast and that nothing in your tax position will cause a surprise. If property or guarantees are involved, everyone signing should understand what they are agreeing to, and some may want independent legal advice.

The short version

• A line that never comes down is acting like an expensive loan
• Long-term assets suit term or equipment finance instead
• Size it from real cash flow, not a round number
• Know the cost of holding the limit, not just using it

How we work through it with you

After you enquire, a real person picks up your details and calls to talk through the purpose, the timing and how the money will be repaid. Unsecured funding is assessed mainly on bank statements and turnover. Property-secured funding is assessed on the property, with no valuation required, and interest can be prepaid or added to the loan. You see the total cost before you commit, and the credit check only happens once you decide to proceed. If the timing is tight, tell us the deadline on the first call so the work can be planned around it.

Is funding the right answer here?

Good borrowing has a job and an end date. Before you enquire, write down in one sentence what the money is for and how it will be repaid. If that sentence is easy to write, you are probably in the right place. If it is not, it is worth a closer look at the business’s cash flow before taking on new repayments.

A simple preparation list

A little preparation makes the first conversation far more useful, and it means the person who calls you can talk about options rather than chasing basic details:

• Your ABN and the legal name of the business.
• Online banking access, so recent statements can be shared through a secure read-only link.
• A rough figure for monthly turnover and the amount you need.
• A list of current loans and repayments, including any ATO payment plan.
• If property is involved, the address and roughly what is owed on it.

A quick word on the enquiry form

The enquiry asks for the amount, the purpose, how long you have traded, your monthly revenue, your credit history, your state and whether you own real estate. Each answer steers your enquiry towards the right option. Accurate answers let the first call move straight to solutions. Rounded-up turnover or a credit history that turns out to be different from the form means starting again, which costs everyone time.

See what you could qualify for

You can check your eligibility in about a minute. There is no credit check to enquire, no lead farming and no call centre script, just a person who looks at your situation and tells you plainly what could work. The more accurate the answers on the form, particularly the amount, revenue and whether you own real estate, the faster and better that first conversation will be.