The short answer
Think of a business line of credit as an approved limit you can dip into whenever you need it. You draw what you need, pay interest only on what you've used, and as you repay, the funds become available to draw again. It suits businesses with uneven cash flow that need short-term flexibility rather than a single lump sum.
How does a business line of credit work in NZ?
It works like a pool of funds with a set limit. You draw from it when you need cash, repay when money comes in, and the repaid amount becomes available again. It’s built for businesses whose cash needs rise and fall through the month or year, rather than businesses that need one big amount for one big purchase.
Think of it as a buffer you control. A wholesaler might draw to pay for a container of stock, then repay over the next eight weeks as the stock sells. A contractor might draw to cover wages while waiting for a progress payment, then clear the balance when the payment lands.
How does a line of credit work?
The mechanics are simple once you’ve seen them laid out:
- A lender approves a limit, based on your trading, credit and sometimes security.
- You draw funds as needed, usually online or by request, up to that limit.
- Interest is charged on the drawn balance, not the full limit.
- You make repayments, which may be a minimum amount each month or a set schedule for each drawdown.
- Repaid funds free up and can be drawn again.
- The facility is reviewed periodically, often annually, when the lender can adjust or renew the limit.
Some facilities work like a true revolving account. Others treat each drawdown as a mini loan with its own short repayment period. Ask which one you’re getting, because it changes how you’d use it.
Line of credit vs overdraft vs term loan
These three get muddled all the time. Here’s how they stack up.
| Feature | Line of credit | Bank overdraft | Term loan |
|---|---|---|---|
| How you get funds | Draw as needed up to a limit | Account goes into negative balance | Lump sum upfront |
| Interest charged on | Drawn balance | Overdrawn balance | Full loan balance |
| Repayment | Flexible, often minimums per drawdown | Usually repayable on demand | Fixed schedule over a set term |
| Who provides it | Banks and non-bank lenders | Your bank, tied to your account | Banks, non-bank and private lenders |
| Typical use | Recurring, uneven cash needs | Day-to-day buffer | One-off purchase or planned project |
| Risk to watch | Using it for long-term needs | Bank can reduce or cancel it | Paying interest on unused funds |
If you want the deeper comparison between a fixed loan and a revolving facility, read cash flow loan vs business overdraft.
Who does a business line of credit suit?
A line of credit earns its keep when your cash needs are recurring and unpredictable. Good fits include:
- Wholesalers and importers who buy stock in bulk ahead of sales
- Builders and trades waiting on progress claims or retentions
- Seasonal businesses that spend before peak season and earn during it
- Professional services firms with work in progress and clients on 30 to 60 day terms
- Hospitality operators managing uneven weekly takings and supplier accounts
It suits less well when the need is a single, known amount. If you’re paying out an IRD debt, buying a vehicle or funding a fit-out, a lump-sum loan with a clear end date is usually tidier.
What does a business line of credit cost?
We don’t quote rates or fees, because every facility is priced on the client’s individual circumstances. What you should understand is how the cost is built, because it’s different from a standard loan:
- Interest on the amount drawn, for as long as it’s drawn
- Establishment fee to set up the facility
- Line or commitment fee some lenders charge on the limit, whether you use it or not
- Account or review fees charged monthly or annually
- Drawdown fees on some products each time you draw
The cheapest-looking facility can become expensive if it carries a line fee you’re paying on money you rarely use. Equally, a facility you actually draw on constantly may cost more than a term loan sized to your real need. When you’re comparing options, the compare loan offers tool helps you look at total cost rather than the headline.
What do lenders look for?
Because a line of credit is open-ended, lenders want confidence in how your business behaves over time. Expect them to review:
- Business bank statements, usually several months, to see regular income and how you manage your balance
- Trading history, with longer-established businesses generally finding it easier
- Credit history for the business and its directors
- Existing debts, including IRD arrangements and other facilities
- Security, which may be a general security interest registered on the PPSR, a personal guarantee, or property
Not sure how you’d look to a lender? The loan readiness check takes a couple of minutes.
The common trap: using revolving credit for long-term needs
The biggest mistake we see is a line of credit that never comes back down. When a facility sits fully drawn for months, it has quietly turned into an expensive long-term loan, but without the clear repayment plan.
Signs it’s happening:
- The balance hasn’t dropped below 80% of the limit in several months
- You’re drawing to make the minimum repayment
- New costs, such as a vehicle or a tax bill, are being paid from the facility
If that sounds familiar, it often makes sense to pay down the revolving balance with a term loan that has a defined end date. Many business owners use business debt consolidation for exactly this.
Secured or unsecured line of credit?
Lines of credit come in two broad flavours, and the difference matters.
Unsecured lines of credit are assessed mainly on your bank statements and trading history. Limits tend to be smaller and tied closely to your turnover, and the lender may still register a general security interest over business assets on the PPSR or ask directors for personal guarantees. They’re usually quicker to set up.
Secured lines of credit are backed by property or significant business assets. Limits can be larger and pricing sharper, but setting one up takes longer because the security has to be valued and documented. If the property is your home, the stakes are higher if the business struggles, so be clear-eyed about how much buffer you really need.
How to use a line of credit well
A line of credit is a tool, and like any tool it works best with a few house rules:
- Set a target balance. Decide what “normal” looks like, for example drawn for no more than a few weeks at a time, and review it monthly.
- Match each draw to a source of repayment. If you draw $40,000 for stock, know which sales will pay it back and roughly when.
- Keep fixed costs off it. Rent, loan repayments and new equipment shouldn’t live on revolving credit.
- Watch the fees, not just the interest. If you rarely draw, a facility with a line fee may cost more than it’s worth.
- Have a plan B. Limits are reviewed, so don’t build your whole cash flow around a facility that could be reduced.
Business owners who use a line of credit this way tend to get the best of it: flexibility when they need it and a low cost when they don’t.
How LoansOne can help
LoansOne’s core products are lump-sum loans: unsecured business loans from $20,000 to $500,000 with no real estate security in most cases, and fast, flexible 1st or 2nd mortgages for business purposes from $20,000 to $500,000, with no cash flow or financial records needed and bad credit OK.
That makes us useful in three line-of-credit situations:
- You’ve been declined for a facility, or the limit offered is too small.
- Your existing facility is maxed out and needs clearing so it can work as a buffer again.
- Your need is really one-off, and a fixed loan will be cheaper and easier to manage.
An expert reviews every application and tells you honestly which structure fits. We match you to the right lender rather than spraying your details around, and an enquiry doesn’t mark your credit file.
Example: a Wellington café between seasons
Picture a Wellington café with strong summer takings and a quiet winter. The owner wants to replace a failing chiller and carry the winter wage bill without stress. A revolving facility could cover winter wages, but the chiller is a one-off. A modest unsecured loan for the chiller, paired with good cash flow planning, may be simpler than a facility that tempts the business to fund everything from one pot. An illustrative scenario, not a real client.
Next step
Want to know whether a line of credit, an unsecured loan or a property-backed loan suits your cash flow best? Apply in about 30 seconds. It’s free, doesn’t mark your credit file, and an expert reviews your situation before a lender makes contact. Prefer to talk? Call 09-888 5252.
