How to Use a Business Line of Credit Without Getting Stuck in Debt
Business owner managing a business line of credit safely – Switchboard Finance
How to Use a Business Line of Credit Without Getting Stuck in Debt
A business line of credit (LOC) should feel like a safety rail, not a cliff edge. Used well, it smooths cash flow, lets you pay suppliers on time and gives you confidence to take on bigger work. Used badly, it quietly turns into expensive, revolving debt that never quite gets cleared.
In this guide, we’ll walk through simple rules for using a LOC safely—how to set a clean limit, manage repayments, and pair it with working capital loans and invoice finance so it supports your growth instead of fighting it. If you’re still deciding whether you even need a LOC, cross-check this with 5 Cash Flow Warning Signs Your Business Needs a Finance Safety Net.
1. Decide what your LOC is for (and what it is not for)
A LOC works best when it has a clear job: covering short-term timing gaps in cash flow, not funding everything forever. For example:
- ✅ Pay suppliers a week early while you wait for invoices to clear.
- ✅ Cover payroll when a big debtor is a few days late.
- ❌ Buy long-term assets that should be on structured asset finance.
- ❌ Fund tax debt that should be consolidated into a working capital loan.
If you’re using your LOC for everything, it’s a sign you need a more complete plan—something we unpack in the Business Cashflow System article.
2. Set a realistic limit based on working capital, not emotion
Many owners ask for “as much as possible” and end up with a LOC that feels like a bottomless pit. A better approach is to size your limit off your actual working capital cycle: how much stock you carry, how long customers take to pay, and how chunky your regular bills are.
As a rough guide, a LOC limit somewhere between one and two months of core overheads is common. Anything beyond that is usually better handled by a term-style working capital loan or specific asset finance facility. If you’re still weighing up an overdraft versus a loan, read Working Capital Loans vs Overdraft alongside this article.
3. Treat LOC repayments like a bill, not a suggestion
A LOC is revolving—money goes out, money comes back as you repay. The trap is only paying the minimum and letting the balance hang around. That’s when a helpful tool becomes long-term debt.
Three practical habits:
- Set a fixed weekly or fortnightly repayment that clears typical usage within 60–90 days.
- Any unexpected lump sum (tax refund, big invoice, asset sale) pays the LOC down first.
- Use your accounting software to tag LOC interest separately so you can see the real cost of keeping balances high.
If you find your LOC balance isn’t falling, it might be time to refinance part of it into a structured working capital loan with a clear end date.
For extra reading, the Australian Government’s business.gov.au site also shares tools and checklists to help you plan cash flow and understand different funding options.
4. Understand your rate and how it might move
Most LOCs are on a variable rate, which means your interest can change with the market. In some cases, a portion of your facility may be fixed—similar to a fixed rate term loan—while the rest remains flexible.
The key is to know:
- Your current rate and how it compares to alternatives like term working capital loans.
- Whether there are fee triggers for limit changes or inactivity.
- How interest is calculated—daily balance versus end-of-month calculations.
If you’re juggling multiple facilities, our Business Loans page and Business Owners Finance Hub break down how they can work together.
5. Pair your LOC with invoice finance instead of maxing limits
If your main issue is slow-paying customers, your LOC can end up permanently maxed while you wait for invoices to clear. In that situation, invoice finance is often a cleaner way to unlock cash tied up in receivables.
Combining the two looks like this:
- Use invoice finance to convert approved invoices into working capital.
- Use your LOC for short, genuine timing gaps instead of long-term funding.
- Use term-style working capital loans for bigger, planned projects.
If you want a full walk-through, jump into Invoice Finance for Growing SMEs after this.
Ready to set up a smarter business line of credit?
Switchboard Finance helps Australian business owners design LOC limits and repayment rules that fit their real cash flow cycle, then pair them with working capital loans and invoice finance where it makes sense.
Explore more guides inside the Business Owners Finance Hub, or talk to a broker about your specific numbers.
Important finance terms on this page
Frequently asked questions about business lines of credit
A term working capital loan gives you a lump sum with fixed repayments and an end date. A business line of credit is revolving—you draw what you need, repay, then reuse the limit, which is better suited to cash flow timing rather than long-term funding.
It depends on your working capital cycle, but many businesses set a limit around one to two months of core overheads. Anything bigger is often better handled by structured working capital loans or an asset finance facility.
Most LOCs are on a variable rate, which means your interest cost can move over time. Some lenders may offer a partially fixed rate structure, but pure fixed-rate LOCs are less common.
You could, but it’s rarely ideal. Vehicles and equipment are usually better funded through asset finance structures such as a chattel mortgage, keeping your LOC free for short-term cash flow swings.
If your balance never seems to drop, limits are always maxed, or your cash flow still feels tight, it’s time to review. You might need to roll some debt into a term working capital loan or add invoice finance so your LOC returns to short-term use only.
