The one-sentence version
A line of credit is a pool of approved funding that your business can dip into and refill, over and over, so you only carry debt when you actually need cash.
The four moving parts
1. The limit
The limit is the maximum you can have drawn at any one time. For an unsecured business line of credit in New Zealand, lenders typically set it from your turnover and what your business bank statements show about regular income and outgoings. Businesses are usually expected to have been trading for six months or more.
A limit isn’t a target. A well-set limit covers your realistic worst gap with some margin, without being so large that repayments would strain you in a quiet month.
2. The draw
A draw is when you move money from the facility into your business account. You might draw $8,000 to cover wages in a slow week, or a larger amount to pay for stock. After the draw, your available balance is the limit minus what you’ve drawn.
3. The repayment
Repayments reduce your drawn balance. Most facilities have a minimum repayment schedule, but many let you repay more whenever cash comes in — when a customer pays, when the season picks up, when a big job is invoiced and settled.
4. The redraw
This is what makes it a revolving facility. Each dollar you repay becomes available to draw again. You don’t reapply; the limit simply refills.
A worked example
Example scenario — illustrative only. A Nelson marine services business has a line of credit with a $40,000 limit.
| Date | Action | Drawn balance | Available |
|---|---|---|---|
| 1 May | Facility opened | $0 | $40,000 |
| 10 May | Draws to pay winter wages | $12,000 | $28,000 |
| 2 June | Draws to buy engine parts | $22,000 | $18,000 |
| 20 June | Customer pays; repays part | $10,000 | $30,000 |
| 15 August | Repays remainder | $0 | $40,000 |
| 1 October | Draws for spring stock | $15,000 | $25,000 |
Across the year, the business used up to $22,000 at the busiest point, but it wasn’t carrying that for the whole year.
What does holding a line of credit cost?
Costs vary by lender and by business, so there’s no single answer — and anyone quoting you a rate before understanding your business is guessing. The components can include charges on the amount drawn, and sometimes charges for establishing or keeping the facility. Ask your lending specialist to set out every cost in writing, and compare the total, not one headline figure.
Every facility we arrange is priced on the individual business, and we look for the sharpest option available for your situation.
How lenders decide the limit
Understanding how the limit is set helps you prepare:
- Monthly turnover and how steady it is across the year. Seasonal swings are fine if they’re explained.
- Account conduct — dishonoured payments, how often the account runs near zero, and whether bills are paid on time.
- Existing debt — other loan and lease repayments coming out of the account.
- Time trading — usually six months or more.
- Credit file — weaker credit is considered, but recent arrears will be looked at closely.
Our guide to preparing for a funding conversation covers what to have ready.
Line of credit, overdraft or loan?
Lines of credit are closest to overdrafts: both are revolving and both suit timing gaps. The main differences are that a line of credit usually sits separately from your transaction account and may come from a non-bank lender. A term loan, by contrast, suits one-off, long-lived purchases. See line of credit vs overdraft vs term loan for a full comparison.
Five habits of businesses that use credit lines well
- Give the facility a job. Wages in the off-season, stock for peak, tax timing. Not “whatever comes up”.
- Know the repayment source before drawing. A specific invoice, a season, a sale.
- Get back to zero regularly. If the balance never clears across a full year, it has become long-term debt, and a different structure may be cheaper.
- Keep a cash buffer too. The facility covers the big gaps; a reserve covers the small surprises. See building a cash buffer.
- Review the limit yearly as turnover changes.
When a line of credit isn’t the answer
If your business is very new, if you need a large lump sum for a one-off purchase, or if the gap isn’t temporary, a line of credit may not be the right tool. Businesses that own New Zealand property — or have a supporting party who does — can look at a property-secured loan of $20,000 to $1m. It’s a lump sum rather than a revolving facility, and no financials or tax returns are needed for the initial assessment.
If you need one
A business line of credit through Capital On Call starts with a 60-second enquiry that doesn’t affect your credit score. A lending specialist then calls to talk through your cash pattern and what limit would genuinely help.