What is a line of credit?
- By Book Keeping Pros
- Sources checked 15 Oct 2026
Definition
A line of credit is an arrangement with a lender that lets a business borrow money as it needs it, up to an approved limit. The business can draw, repay and draw again while it stays under the limit, and it pays interest only on the amount it has actually borrowed, not on the whole limit.
In the books, a line of credit is usually tracked in a liability account whose balance changes with drawdowns, repayments, interest and fees. Reconcile it against the lender's statement and keep the supporting records for each charge. Your accountant can confirm how interest and fees are treated and any adjustments needed at the end of a reporting period.
Because money can be drawn again as soon as it is repaid, a line of credit can blur the difference between the business's own money and borrowed money. Recording what each drawdown paid for, and showing planned drawdowns and repayments on separate lines of the cash flow forecast, makes it clear how much of the spending is funded by borrowing.
In Australia
business.gov.au's glossary describes a line of credit as an arrangement under which a borrower can draw funds from an account, as long as the total stays within an approved limit. Its loan guide calls it a revolving loan, meaning funds can be drawn as often as needed while the balance stays below the credit limit, and says interest applies only to the borrowed amount.
Its funding guide lists a line of credit among the options for growing a business and for buying stock to sell, and includes lines of credit in the range of products offered by banks, building societies and credit unions.
Worked example
| Date | Entry | Amount (AUD) | Balance owing (AUD) |
|---|---|---|---|
| 1 Aug 2026 | Opening balance owing | 2,000.00 | |
| 4 Aug 2026 | Drawn to pay a supplier | 8,000.00 | 10,000.00 |
| 18 Aug 2026 | Drawn to buy stock | 5,500.00 | 15,500.00 |
| 29 Aug 2026 | Repaid from customer payments | 6,000.00 | 9,500.00 |
| 31 Aug 2026 | Interest charged | 74.20 | 9,574.20 |
Illustrative example only: these rows show the method and are not sourced data.
Common mistakes
- Entering a drawdown as income because the money arrived in the bank account.
- Recording a repayment as an expense, when it only reduces the balance owed.
- Skipping the monthly reconciliation of the line of credit statement, so interest and fees go unrecorded.
Related terms
Related service
Management and cash-flow reports
Monthly reports that show where the business stands.
Sources
- Key financial terms
business.gov.au, Australian Government. Current at 15 October 2026, released 9 July 2024. Checked 15 October 2026.
© Commonwealth of Australia 2020, licensed under CC BY 3.0 AU. Licence: CC BY 3.0 AU.
- Apply for a business loan
business.gov.au, Australian Government. Current at 16 October 2026, released 18 February 2026. Checked 16 October 2026.
© Commonwealth of Australia 2020, licensed under CC BY 3.0 AU. Licence: CC BY 3.0 AU.
- Choose your funding
business.gov.au, Australian Government. Current at 16 October 2026, released 18 February 2026. Checked 16 October 2026.
© Commonwealth of Australia 2020, licensed under CC BY 3.0 AU. Licence: CC BY 3.0 AU.