A business line of credit is one of the most useful and least understood tools in small business finance. Used well, it’s a shock absorber. Used badly, it’s a slow leak. Here’s how to tell whether you need one.
What is a business line of credit?
It’s an approved credit limit — say, enough to cover a month of supplier bills — that you can draw from whenever you need to. When customers pay, you repay the line, and the limit is available again. You typically pay only on the amount you’ve drawn, for as long as it’s drawn.
Think of it as a reservoir you fill and drain with the rhythm of your business, rather than a single bucket of water.
How is it different from a loan?
| Line of credit | Business loan | |
|---|---|---|
| How you receive funds | Draw what you need, when you need it | Lump sum up front |
| Repayments | Flexible, as cash comes in (minimums may apply) | Regular fixed instalments |
| Reuse | Yes — repaid funds can be drawn again | No — you apply again for more |
| Best for | Recurring timing gaps | One-off purchases or projects |
Is it the same as a bank overdraft?
Similar idea, different home. A bank overdraft sits on your everyday transaction account and is typically reviewed annually against your financial statements. A line of credit from a non-bank lender is a separate facility, usually assessed on your turnover and recent bank statements rather than full financials. For businesses that don’t have, or can’t get, an overdraft big enough, it fills the same role.
Signs you’d benefit from a line of credit
- You pay before you get paid. Suppliers want payment in 7 days; your customers take 30 or more. Xero’s Small Business Insights for the June 2026 quarter found New Zealand small businesses waited on average about 24 days to be paid, and were still paid late on average.
- The gap repeats. It happens most months, or reliably every season.
- Opportunities come up at short notice. A supplier offers a discount for bulk or early payment; a contract needs materials bought now.
- Tax dates squeeze you. GST on the 28th lands before a big customer pays on the 20th of next month.
Signs a line of credit is the wrong tool
- The business is losing money month to month. A line of credit bridges timing; it doesn’t fix a structural shortfall. It will just fill up and stay full.
- You need a large, one-off sum. Buying a vehicle, a business or a fit-out usually suits a term loan or a property-secured loan.
- You’d be tempted to use it as income. Be honest with yourself about this one.
What do lenders look at?
Lines of credit are generally available to businesses usually trading 6+ months, with the limit based on turnover and bank statements. Weaker credit is considered, and decisions are sometimes same day. Lenders will look closely at how steady your deposits are, what’s already committed to other repayments, and how the account is run. Our guide to what lenders look for in bank statements explains the detail.
What does it cost?
Every facility is priced on the individual situation. When comparing, ask for the total cost of a realistic scenario — for example, drawing a set amount for 30 days, four times a year — including any establishment, line or drawdown fees. That tells you far more than any headline figure. Our guide to reading a business loan offer lists the questions to ask.
A simple test
Pull up the last six months of your business bank account. Mark the lowest balance each month and what caused it. If the low points are regular and caused by timing — wages, GST, suppliers — rather than losses, a line of credit is likely a good fit. If they’re getting deeper each month, talk to your accountant about the underlying numbers first.
Talk it through
Ring the Hotline and tell a specialist how your cash moves through the month. They’ll tell you whether a line of credit, a short loan, or neither is the right answer. Or request a call back.