Business lines of credit in New Zealand

Some cash flow problems happen once. Others happen every month: the wages go out on Thursday, but the big customer pays on the twentieth; the stock has to be bought in August for sales in November. Taking out a fresh loan every time that happens is expensive and tiring. A line of credit is built for the gaps that keep coming back.

How it works

You’re approved for a limit, say $40,000. You draw what you need, when you need it, and repay it as money comes in. Once repaid, the limit is available again. Interest is charged only on what’s drawn, for as long as it’s drawn.

Feature	Line of credit	Term loan
Funds	Draw as needed up to a limit	Paid in one lump sum
Interest	On drawn balance only	On the full loan
Repayment	Flexible, often a minimum each month	Fixed schedule
Best for	Repeating, uneven gaps	One-off costs

What lenders look at

The limit depends mostly on how your business trades. Expect a lender to review six to twelve months of bank statements, check that GST returns are filed, look at your credit files and ask about existing debts. Some will want to see an aged debtors list, especially if the gap is caused by customers paying on long terms. A steady account with regular deposits supports a higher limit than one that swings wildly.

Costs to ask about

Lines of credit can carry costs that term loans don’t:

• Line or facility fees, charged on the limit whether you use it or not.
• Draw fees, charged each time you take funds.
• Annual review fees when the facility is renewed.
• Interest on the drawn balance, which may be calculated daily.

Add these up for the way you’d actually use the facility. A line you dip into twice a year might cost more in fees than it saves in interest.

Using it well

The discipline is to treat the limit as a bridge, not a balance. Draw for a specific gap and repay when the money lands. If the balance never comes down, the facility is funding a loss rather than a timing gap, and that’s a sign to look at pricing, costs or a longer-term working capital loan instead. Keeping GST and PAYE in a separate account helps too, so tax money isn’t quietly propping up the limit.

An illustrative example

A Nelson landscaping business with six staff pays wages weekly but is paid by property developers on 30 to 45 day terms. Every month it’s short for about three weeks. It arranges a $35,000 line of credit, draws $20,000 to $30,000 when invoices are outstanding and repays as each developer pays. Over a year, the average balance is around $12,000, so it pays interest on that rather than on a $35,000 loan. Illustrative only.

When a line of credit isn’t the answer

If you’re buying something that lasts years, a vehicle or machine, use equipment finance instead. If the gap is a single large one, such as a tax bill or one big order, a short term loan may be simpler and cheaper. And if the balance never clears, it’s worth talking to your accountant about whether the business has a cash flow problem or a profit problem; the fix is different.

Getting a limit increased later

Lenders are usually happy to review a limit once you’ve run the facility well for six to twelve months. Repaying on time, keeping the balance moving and showing growth in deposits all help. Ask what the review process is before you sign, so you know what to aim for.

Secured or unsecured lines

Most lines of credit offered to smaller businesses are unsecured, backed by a director guarantee and sometimes a general security interest registered on the PPSR. Some lenders offer a larger limit secured over property, which can suit a business with bigger swings in cash flow, such as a seasonal exporter or a contractor carrying several jobs at once. A secured line usually costs less but puts the property at risk if the business can’t repay, so everyone on the title should understand the arrangement and get independent legal advice before signing.

Keeping the facility healthy

Lenders watch how a line is used. A balance that rises and falls with your trading looks like a well-run facility. A balance that sits at the limit for months, or repayments that only ever cover interest, can trigger a review or a reduced limit. Setting a simple rule, such as clearing the balance within sixty days of each draw, keeps you in control and makes renewal easier.

Tell us about your gap

Tell us what causes the gap, how big it gets and how long it lasts. Asking won’t mark your file, your enquiry isn’t passed down a list, and a real person reads it and calls you back to talk through whether a line of credit or a loan fits better. Start your enquiry.