A business line of credit is a pre-approved pool of funds you draw from when needed. You only pay interest on what you use. When you repay, the funds become available again. No reapplication. Rates from 14.55% p.a. Limits from $10K to $500K.
Most business owners understand credit cards. A business line of credit works on the same principle, but with lower rates, higher limits, and more flexible repayment. Here is exactly how it works, step by step, with real numbers.
$100,000 is your approved limit. You draw $40,000 to pay a supplier on Monday. Interest starts accruing on that $40K only. Your client pays you $25,000 on Friday, you put it back into the facility. Now you owe $15,000. Interest drops to match. Next week you draw $30,000 for payroll. Your balance goes to $45,000. The cycle continues indefinitely.
You never reapply. You never wait for approval on individual draws. The money is there when you need it, and you only pay for what you use.
6 steps from application to ongoing use. The whole process takes as little as 4 hours for the initial setup.
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Check eligibility →18% p.a. on $50,000 drawn equals $24.66 per day. Here is the full breakdown of how lenders calculate your interest charges.
Interest is calculated daily using this formula: drawn balance x annual rate / 365 = daily interest charge. At the end of each month, all daily charges are totalled and debited from your facility.
Example: You draw $50,000 on a facility with an 18% p.a. rate.
Daily interest: $50,000 x 0.18 / 365 = $24.66 per day.
If you hold that $50K for a full month (30 days): $24.66 x 30 = $739.73 interest for the month.
If you repay $20K on day 15, interest for days 16-30 drops to: $30,000 x 0.18 / 365 x 15 = $221.92.
Total month's interest: $369.86 (first 15 days) + $221.92 (last 15 days) = $591.78.
This is the key advantage over a term loan. With a $50K term loan at 18%, you pay $750/month in interest regardless of whether you still need the full $50K. With a line of credit, your interest drops every time you make a repayment.
On top of interest, you pay a line fee of 1-2% p.a. on the total approved limit. On a $100K facility, that is $83-$167/month. This applies whether you draw or not. Think of it as the cost of having the facility available. See our full rates guide for 2026.
1 key difference separates a line of credit from an overdraft. Everything else is functionally the same.
A business overdraft is linked directly to your business transaction account. When your account balance hits zero, you keep spending using the overdraft facility. Repayment happens automatically when deposits arrive. It is built into your everyday banking.
A business line of credit is a separate account. You manually draw funds from it into your transaction account when needed, and you manually repay. It sits alongside your banking rather than inside it.
| Feature | Line of credit | Business overdraft |
|---|---|---|
| Account type | Separate facility | Linked to transaction account |
| How you draw | Manual transfer request | Automatic when balance hits zero |
| How you repay | Manual transfer back | Automatic from incoming deposits |
| Interest on drawn funds only | Yes | Yes |
| Revolving | Yes | Yes |
| Line fee | Yes (1-2% p.a.) | Yes (1-2% p.a.) |
| Rates (unsecured) | 13-22% p.a. | 14-25% p.a. |
In practice, most non-bank lenders use the terms interchangeably. When you apply through OverdraftMe, we match you to the best product regardless of what the lender calls it. The rates, limits, and functionality are what matter. Read our full comparison guide.
$6,000 to $500,000 in working capital needs is the sweet spot. Here is when a line of credit is the right product, and when you should look at something else.
Business: Electrical contractor, 2 years trading, $65K/month revenue, Equifax 620.
Approved: $80,000 line of credit at 16.5% p.a., 1.5% line fee, $495 establishment fee.
Month 1: Draws $35K for materials on a new commercial job. Repays $20K when progress claim is paid on day 18. Draws another $15K for subcontractor wages on day 22.
End of month balance: $30,000. Monthly interest: ~$438. Line fee: $100. Total cost for the month: $538.
Month 2: Client pays remaining $40K invoice. Contractor repays $25K. Draws $10K for next job. Balance drops to $15K. Monthly interest: ~$206. Total cost: $306.
The facility cost the business $538 in month 1 and $306 in month 2. Both amounts are tax deductible. Without it, the contractor would have missed the commercial job entirely.
This is the pattern we see in most of our settled deals. The balance moves up and down with the business cycle. Total interest paid is far less than a term loan because the drawn amount fluctuates.
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Get started →General information only. Not financial advice. Credit subject to lender assessment. All rates, fees and terms quoted are indicative only and subject to change based on your individual circumstances, credit profile and lender policy at the time of application. OverdraftMe is a credit representative of Lend & Loan Pty Ltd (ACL 511092).
No. You only pay interest on the amount you have drawn, not the full approved limit. If your limit is $100K and you draw $30K, interest is charged on $30K only. The remaining $70K sits available at no interest cost. A small line fee (1-2% p.a.) applies to the total limit.
Interest is calculated daily on the closing drawn balance and charged monthly. The daily rate is your annual rate divided by 365. For example, $50K drawn at 18% p.a. = $50,000 x 0.18 / 365 = $24.66 per day. At the end of each month, the accumulated daily interest is debited from your facility.
Both are revolving facilities where you draw and repay as needed. The main difference is structural: an overdraft is linked to your transaction account and activates when your balance goes below zero. A line of credit is a separate facility you draw from manually. In practice, most non-bank lenders treat them as the same product.
Yes. There are no early repayment penalties on revolving facilities. You can repay part or all of the drawn balance at any time. When you repay, the funds become available to draw again. This is one of the key advantages over a term loan, which may have break costs.
Use a line of credit for ongoing, variable cash flow needs: payroll, supplier payments, stock purchases, tax bills, and seasonal gaps. Use a term loan for specific one-off purchases like equipment or vehicles where you know the exact amount and want a fixed repayment schedule.