Business Line of Credit vs Business Loan: A Melbourne Broker’s Guide for 2026

Melbourne SMEs make this mistake quietly, and it costs them. The most common version: a business owner approaches a bank for a line of credit, gets offered a term loan instead — or vice versa — and accepts whatever product the bank presents without understanding the structural difference. Six months later, either the facility is exhausted at the wrong moment, or they’re paying interest on a balance that was never meant to be permanent.

I spent over a decade in business banking at NAB before co-founding IFG, and the gap between what banks offer and what Melbourne SMEs actually need in their working capital structure is one of the most consistent issues I see. This guide explains the structural difference between a business line of credit and a business loan, when each product fits, what they cost in 2026, and when holding both simultaneously is the right answer.

What’s the actual difference between a business line of credit and a business loan?

A business line of credit is a revolving facility: you draw funds up to an approved limit, repay, and draw again — paying interest only on the amount drawn, only for the period it’s outstanding. A business loan is a lump sum disbursed upfront, repaid on a fixed or scheduled basis over a set term. These aren’t cosmetic differences; they determine what each product actually costs and which situations each one suits.

The headline principle is straightforward: a line of credit suits working capital — recurring, repeatable short-term needs where the draw fluctuates with business conditions. A term loan suits capital expenditure — a specific, defined outlay that creates long-term value and should be repaid over the useful life of the asset or project. When Melbourne SMEs swap these, they pay more than they need to, and usually don’t know they’re doing it.

For a full overview of business finance options for Melbourne SMEs — including working capital facilities, term loans, equipment finance and commercial property — see IFG’s business finance broker page.

Is a business overdraft the same as a line of credit?

Not exactly — though both are revolving facilities and the terms are sometimes used interchangeably. An overdraft is linked to your business transaction account and allows the balance to go below zero up to an agreed limit. A formal line of credit is a separate facility with its own drawdown mechanics, its own account, and often a different rate and structure. In practical terms for Melbourne SMEs, the distinction matters most in how each is assessed and priced.

The three main working capital facility types you’ll encounter in 2026:

• Bank overdraft (secured): Linked to your business transaction account, backed by property or offered on a relationship basis to established customers. Rates on secured bank overdrafts typically sit in the 7%–9.5% range with the RBA cash rate at 4.35%. Application goes through your existing bank, which means rate competition is limited to what that single lender offers. Limits of $50,000–$500,000+ for established businesses with adequate security.
• Bank overdraft (unsecured): Available for smaller limits — typically $20,000–$100,000 — based on turnover and credit history. Rates are materially higher: 12%–18%+ at most providers. Approval is faster and documentation lighter than a secured facility.
• Non-bank line of credit: Offered by specialist non-bank lenders and assessed primarily on cash flow via open banking, rather than security. Faster to approve than a traditional bank overdraft, with more flexible drawdown mechanics. Secured non-bank LOCs can compete with bank rates; unsecured non-bank LOCs sit higher, though pricing varies widely across the panel.

The key point is that an overdraft is what your existing bank most readily offers for short-term working capital — priced based on the relationship, not market competition. A broker accessing a deliberately broad panel of bank, non-bank and specialist lenders can identify the right facility type and the most competitive pricing for your situation. For Melbourne businesses without real property security, a non-bank open-banking LOC is often faster to approve and more flexible than a traditional bank overdraft.

When does a line of credit cost more than a business loan — and what is facility creep?

This is the question most comparison guides skip, and it’s the reason product selection matters as much as rate. A line of credit is designed for short-term, revolving use where the balance is regularly drawn and repaid. If the balance stays drawn and never (or rarely) clears, the facility quietly becomes expensive long-term debt priced at line-of-credit rates — almost always higher than what a secured term loan would have cost for the same amount over the same effective period. This is facility creep.

A concrete Melbourne example: a hospitality business uses a $150,000 unsecured LOC to fund a kitchen fitout and, because cash flow is tight, never reduces the balance materially over three years. At 15% p.a., that’s roughly $22,500 per year in interest — $67,500 over the period. A secured equipment loan for the same purpose at 7.5% p.a. over three years would cost approximately $18,000 in total interest. The wrong product, used the wrong way, costs that business nearly $50,000 in avoidable interest. This is not a hypothetical — it’s a pattern we see consistently when reviewing working capital structures.

The reverse also applies. Using a term loan for working capital means fixed repayments on funds you may not need in a given month — and you can’t redraw without reapplying. A Melbourne construction business using a $200,000 term loan to bridge payroll and supplier timing gaps will pay more in interest than if it held a $200,000 LOC and drew only what it needed each month. Related: our guide on ATO debt and business lending covers a similar scenario where incorrect facility structure compounds an already difficult cash flow position.

Can a Melbourne SME hold a line of credit and a business loan at the same time?

Yes — and for many established Melbourne businesses, holding both simultaneously is the optimal structure. The two products serve different purposes and draw from different parts of a lender’s credit assessment. There is no rule against holding both, and in commercial banking it is the norm rather than the exception for businesses beyond the startup phase.

A typical dual-product structure for a growing Melbourne SME:

• A secured term loan (3–7 year term) for a defined capital outlay — equipment, a commercial property deposit, fitout or business acquisition — with fixed or variable repayments aligned to the useful life of the asset or the investment horizon.
• A secured or unsecured line of credit for ongoing working capital — covering payroll timing, quarterly BAS obligations, stock purchases, and short-term supplier payment gaps.

The practical consideration: when a lender assesses a new facility, they look at your total credit exposure — including existing LOC limits, whether or not they’re fully drawn. A $500,000 term loan and a $200,000 LOC are treated as $700,000 in committed exposure when the next application is assessed. Melbourne SMEs planning to hold both should think carefully about how the combined position affects future borrowing capacity — particularly if a commercial property purchase or major equipment acquisition is on the roadmap within 12–24 months.

IFG’s commercial lending team models the combined facility structure and total serviceability position before any application is submitted. For businesses operating in more complex capital environments — for example, using working capital alongside development finance or private lending — see IFG’s complex lending page for an overview of how these structures are arranged.

What do lenders actually look at when you apply for a line of credit in 2026?

The assessment framework for a business line of credit has changed materially in 2026, particularly for unsecured facilities. Open banking — consent-based, read-only access to business bank account data — has replaced traditional documentary requirements at many non-bank lenders. Where a bank required two years of business tax returns, management accounts and BAS statements, a specialist non-bank lender can now make a credit decision in 24–72 hours based primarily on the cash flow pattern through the business’s accounts.

For secured facilities (property as security), the assessment framework remains closer to traditional commercial lending. Lenders typically want:

• At least 2 years of ABN trading history
• Business financial statements or tax returns for the last 1–2 income years
• BAS statements for the most recent 4–8 quarters
• Evidence of property ownership and a current valuation or automated valuation model (AVM)
• A directors’ guarantee from all company directors — see our guide to directors’ guarantees explained for what this obligation means in practice before you sign

For unsecured facilities assessed via open banking, the bar is lower on documentation but higher on cash flow consistency:

• Minimum 6–12 months ABN trading (lender dependent)
• Read-only access to 12 months of business bank account statements
• Consistent monthly revenue — most lenders look for $10,000–$20,000/month minimum for meaningful limits
• Clean credit history: no recent defaults, undischarged bankruptcies or unresolved ATO debt sitting ahead of the lender in the creditor queue

ASIC’s responsible lending obligations apply to both pathways. Any lender or broker arranging a business line of credit must assess that the product is not unsuitable for the borrower’s situation. ASIC’s Regulatory Guide 209 sets out the responsible lending framework that governs business credit facilities arranged by licensed brokers and lenders.

How IFG structures working capital for Melbourne businesses

Frank Marin and I have been arranging working capital facilities and commercial lending for Melbourne businesses since 2003, coming from NAB’s commercial banking team where these decisions were made daily. In 45+ years of combined experience, the pattern is consistent: Melbourne SMEs apply direct to their bank, receive whatever product the bank most readily offers, and accept it without understanding whether a better structure or pricing exists through the broader market.

What IFG does differently:

• We assess the purpose first. Before recommending a LOC or a term loan, we understand what the funds are for, how quickly they’ll be repaid, and whether the business’s cash flow pattern supports a revolving facility being used efficiently. The wrong structure costs money regardless of the rate.
• We access a deliberately broad panel of bank, non-bank and specialist lenders. Your existing bank offers one version of a line of credit. The broader market offers different structures, different security thresholds, open-banking-assessed facilities, and meaningfully different pricing — including products that weren’t available 18 months ago.
• We model the combined facility impact. If you hold or intend to hold both a LOC and a term loan, we look at how the total credit exposure affects future applications — particularly if a commercial property purchase or equipment acquisition is on your roadmap. Use our finance calculators to model repayments before speaking with us.
• We answer the same business day — by a director. Working capital timing matters. A payroll obligation doesn’t wait for a call centre queue. Every enquiry to IFG is handled by Brian or Frank directly — not a junior broker, not an automated process.

General information only — not financial advice. Business finance structures, tax treatment and eligibility requirements should be discussed with a licensed finance broker and your accountant, who can assess your specific circumstances. Always speak with your accountant before making decisions with tax or accounting implications.