A commercial line of credit is assessed on your financials, not just statements. What lenders add at commercial size: covenants, reporting, review.
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Commercial Line of Credit · Covenants · Annual Review
What a lender adds when a business line of credit becomes commercial sized: financial covenants, regular reporting, security and an annual review that reprices the facility.
Quick Answer
A commercial line of credit is a revolving facility for an established business, assessed on full financial statements rather than bank statements alone, and it usually comes with covenants, regular reporting and an annual review that a small business line does not carry. The trade is a larger, cheaper-to-hold business line of credit in return for promises the lender tests, typically backed by a general security agreement.
Also called: revolving credit facility, commercial revolving facility. Revolving credit facility is the bank term; it is the same product at a larger size.
What is a commercial line of credit?
A commercial line of credit is a revolving limit that an established company can draw, repay and redraw, written on a lender's commercial book rather than through its small business product. Banks usually call it a revolving credit facility. It is the same mechanic as any line of credit, with a bigger limit and heavier terms around it.
It tends to suit a company with several years of trading, accountant-prepared or audited financials, and a working capital need that moves with contracts, stock or debtors. If you are still deciding whether a line fits your business at all, our small business line of credit guide covers the basics first.
From the underwriter's seat, the change is simple: the lender reads your financials, not just your statements. A small business line is often sized off bank conduct and a clean credit file. A commercial line is sized off profit, the debt already on the balance sheet, the quality of the accounts and the people producing them. That is why the paperwork, and the promises, get heavier as the limit grows.
How is a commercial line of credit different from a small business line of credit?
A commercial line of credit differs from a small business line in how it is assessed, secured, priced and watched once it is in place. The core product is the same. What changes is what the lender adds around it.
| Feature | Small business line | Commercial line |
|---|---|---|
| Limit size | Smaller limits, typically set off turnover and bank conduct | Larger limits, typically set off earnings and balance sheet strength |
| Assessment | Bank statements, BAS and a credit file, often with a quick decision | Full financial statements, management accounts and forecasts, with a credit paper |
| Security | Often unsecured or a director guarantee, sometimes a general security agreement | Usually a general security agreement and director guarantees, sometimes property |
| Covenants | Rare, beyond standard conduct terms | Common: financial ratios tested at set dates |
| Reporting | Little or none once the line is open | Regular accounts and compliance certificates as a condition of the limit |
| Review | Light, sometimes automated | Formal annual review that can reprice, resize or restructure |
| Pricing | Published or product-based, varies by lender | Negotiated per deal, varies by lender |
The headline for most owners is pricing. Commercial pricing is negotiated, varies by lender, and often comes as a margin over a base rate plus a fee on the whole limit. A stronger file can typically push both down. What lenders actually look at first is serviceability on the full limit, as if it were drawn, then how much of the credit limit the security and the covenants can safely carry.
How the limit refills as you repay is the same at any size, and our revolving line of credit insight walks through it. Where a commercial facility sits beside an overdraft, term loan or bank guarantee, our guide to business credit facility types shows how they fit under one agreement.
What financial covenants come with a commercial facility?
The financial covenants that come with a commercial facility are promises about your numbers, usually covering earnings against interest, debt against equity or earnings, and a floor on net worth. Each is defined in the facility agreement, and each is tested at dates the agreement sets.
- Interest cover. Earnings must stay at or above an agreed multiple of interest costs. The multiple varies by lender and deal.
- Gearing or leverage. Total debt must stay under an agreed share of equity, or an agreed multiple of earnings.
- Net worth. Tangible net worth must stay above an agreed floor, so the balance sheet cannot be drained by distributions.
- Debt service cover. Some lenders add a test of cash flow against total repayments, not just interest.
The point owners miss is that covenants are tested, not just signed. A ratio that looked comfortable at approval can tighten after a slow half, a big distribution or a new equipment loan. The Reserve Bank's December 2021 Bulletin, Corporate Debt Covenants in Australia, sets out how covenants work in Australian business lending and why lenders use them: they give the lender a reason to talk, and to renegotiate, well before repayments are actually missed.
How each covenant is defined matters as much as the number. Whether earnings are measured before or after owner wages, leases or one-off items can move a ratio a long way. Reading those definitions clause by clause is covered in our letter of offer clauses insight.
What financial reporting do lenders ask for on a commercial line of credit?
Lenders on a commercial line of credit typically ask for annual financial statements, periodic management accounts and a signed compliance certificate showing the covenants were met, each due by a set deadline after period end. Frequency varies by lender and by the size of the limit.
- Annual financial statements, accountant-prepared or audited, usually within an agreed window after financial year end.
- Management accounts, typically quarterly or half-yearly, showing profit and loss and the balance sheet to date.
- Aged debtors and creditors, where the limit leans on receivables.
- A compliance certificate, signed by a director, setting out each covenant calculation and confirming no default.
- Notice of material changes, such as new debt, a change of control, a lost major customer or a legal claim.
Treat this as part of the product. Reporting is a condition of the limit, so a late set of accounts can be a breach on its own, even when the numbers inside them are fine. In our own files, the companies that hold commercial lines easily are the ones with a bookkeeper or accountant who knows the lender's calendar as well as the ATO's. That matters for your BAS cycle too, because management accounts and BAS often come off the same close.
What security sits behind a commercial line of credit?
The security behind a commercial line of credit is usually a general security agreement over the company's assets, plus guarantees from the directors, with property added when the limit or the risk calls for it. The mix sets how large the limit can go and what it costs.
A general security agreement gives the lender a registered interest over the company's present and future assets, including debtors, stock and equipment. Director guarantees put the people behind the company on the hook for any shortfall. Both are standard at commercial size, and our security entry explains how lenders rank them.
The decision for most owners is whether to offer property. Property can typically lift the limit and lower the price, but it puts a home or a building behind working capital. If your plan is to borrow against an owned commercial building, that is a different product, covered in our commercial property equity line of credit insight, and how property security sits behind a revolving limit is covered in our secured business overdraft insight.
Commercial revolving facility, corporate overdraft or term loan: which fits a mid-sized business?
A commercial revolving facility fits a mid-sized business whose funding need rises and falls; a corporate overdraft fits day-to-day swings in the operating account; and a term loan fits a one-off purchase you want paid off on a schedule. Many established companies end up holding two of the three.
| Facility | How it is drawn | How it is repaid | How it is reviewed |
|---|---|---|---|
| Commercial revolving facility | Separate drawdowns against a limit, sometimes in set minimum amounts | Repaid and redrawn freely during the term, interest on the drawn balance | Annual review against covenants and reporting, with a fixed expiry date |
| Corporate overdraft | Runs through the operating account, drawn as payments clear | Deposits reduce the balance automatically | Annual review, and often repayable on demand under the terms |
| Term loan | Usually drawn once, in full | Scheduled repayments over the term, not redrawn | Covenants may still apply, with less room to resize |
In deals I've seen, the overdraft and the revolving facility get confused most. The overdraft is the better tool for daily timing gaps, and the revolving facility is better for larger, planned swings such as a seasonal stock build or a contract that pays late. Our overdraft vs line of credit guide walks through the split, the business overdraft guide covers the operating-account side, and fixed-term borrowing sits on our business loans page.
What happens at annual review, and what if you breach a covenant?
At annual review, the lender re-reads your latest accounts and covenant results and decides whether to renew the facility as it is, reprice it, resize it or ask for more security. A covenant breach brings that conversation forward, and it usually ends in a waiver or a reset rather than a closed facility.
Owners should plan for the fact that review is a repricing point. A good year can typically win a sharper margin or a higher limit; a weaker one can bring a higher fee, a lower limit or tighter covenants. Our 60 day annual review plan sets out what to send before the lender asks.
On a breach, a covenant breach starts a conversation, typically before it ends a facility. The usual outcomes are a waiver for the period, a waiver with a fee or a higher margin, a reset of the ratio, a reduced limit, extra security, or a plan to refinance elsewhere. Telling the lender early, with the reason and a fix, tends to land better than letting them find it in a compliance certificate. Where a bank will not renew, our guide to a bank recalled facility covers the timeline, and our line of credit lenders insight explains how non-bank lenders approach a company leaving a bank.
What counts as an event of default on a commercial facility?
An event of default on a commercial facility is any trigger listed in the agreement that lets the lender act, which usually includes missed payments, covenant breaches, late reporting, insolvency events and a material adverse change. Whether the lender can act immediately or must allow time to fix it depends on the clause. Our guide to business loan protections covers where the law limits what a lender can do, and your solicitor should read the default clause before you sign.
A commercial line of credit is the same revolving tool as a small business line, written for a company the lender can read through its financials. The extra weight comes in four parts: covenants that are tested at set dates, reporting that is a condition of the limit, security that usually includes a general security agreement and director guarantees, and an annual review that can reprice the whole facility. Breaches are common and usually fixable when raised early.
Key takeaway: before you sign, model your covenants against a bad year, not your best one, and set a reporting calendar the day the facility opens.Frequently Asked Questions
A commercial line of credit works as a revolving limit: the company draws what it needs, pays interest on the drawn balance, and the limit becomes available again as it repays. Unlike a small business line, it is usually backed by financial covenants, regular reporting and an annual review. The credit limit is set at approval and can be reset at each review.
A commercial line of credit in Australia is a revolving facility written for established companies, assessed on full financial statements rather than bank statements alone. Banks often call it a revolving credit facility, and both banks and non-bank lenders write them, as our line of credit lenders insight explains.
A line of credit on a commercial property is available from some lenders, who will write a revolving equity line secured by a building you own. It is a property product with its own valuation and loan-to-value rules, covered in our commercial property equity line of credit insight.
A revolving credit facility compares to an overdraft as the more structured of the two: it is drawn in separate amounts against a limit with a fixed expiry, while an overdraft runs through the operating account and is often repayable on demand. Many companies hold both, using the overdraft for daily timing and the facility for larger swings. Our overdraft vs line of credit guide sets out the differences.
An interest cover covenant on a business loan is a promise that the company's earnings will stay at or above an agreed multiple of its interest costs, tested at dates the agreement sets. The multiple, and how earnings are defined, varies by lender and deal. Our letter of offer clauses insight explains how to read the definition before you sign.
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