Quick answer
A business line of credit is a revolving limit you draw on and repay as cash moves, which suits recurring, up-and-down working capital needs. A second mortgage is a lump sum for a specific purpose, repaid by a defined exit. If the business keeps needing money at certain points in its cycle, a line of credit usually fits better. If there's a one-off need with a clear end, a second mortgage may suit. Some lines of credit are themselves secured on property.
Key points
- Line of credit: revolving, draw and repay as needed.
- Second mortgage: a lump sum for one purpose, repaid at exit.
- Recurring needs suit a line; one-off needs suit a lump sum.
- Watch for a 'temporary' line balance that never comes down.
- Lines can be unsecured or property-secured, depending on size.
Some business money needs are shaped like a single bump: a tax bill, a purchase, a settlement. Others are shaped like a wave: up every month or every season, then back down. Matching the funding to the shape is one of the most useful decisions you can make, and it’s where the line of credit versus second mortgage question really lives.
How does each one work?
A line of credit gives the business an approved limit. You draw on it when cash is short, repay when cash comes in, and draw again. You generally pay for what you use. Smaller lines for trading businesses are often unsecured and sized on turnover and bank statements; larger limits may be secured on property.
A second mortgage provides a lump sum for a defined purpose. It’s registered behind your existing home loan and repaid by a planned exit, such as a sale, a refinance or cash flow over a set period. It isn’t designed to be drawn and redrawn.
What shape is your need?
Sketch your cash position over the past twelve months. business.gov.au’s cash flow statement template, with opening balance, money in, money out and closing balance each month, is ideal for this.
| What you see | The need is… | Usually suits |
|---|---|---|
| A single large dip, then recovery | One-off | Second mortgage or term loan |
| Regular dips every month or season | Recurring | Line of credit |
| Steady decline with no recovery | Structural | Neither, until the cause is fixed |
| A one-off dip on top of regular swings | Both | Lump sum for the dip, line for the swings |
The third row matters. If cash has been falling steadily, neither a line nor a lump sum fixes it. See when not to borrow against your home.
When is a line of credit the better fit?
- Seasonal businesses, such as tourism, agriculture or retail, where cash falls before the busy period and recovers after it.
- Businesses with long debtor terms, where wages and suppliers must be paid before customers pay.
- Project-based businesses with uneven progress payments.
- Owners who value flexibility and want to pay only for what they use.
For these, a lump-sum second mortgage can mean borrowing more than needed for most of the year, or borrowing repeatedly.
When is a second mortgage the better fit?
- A one-off cost: a tax debt, a business purchase, a partner buyout, a fit-out.
- A defined event that repays it: a sale, a refinance, a contract completion.
- An amount larger than an unsecured line would allow for your turnover.
- A need you don’t want to recur. A lump sum with an end date creates discipline that a revolving line doesn’t.
If your need fits this list, you can send a short enquiry to see what’s realistic. There’s no credit check when you first enquire.
What are the traps with each?
With a line of credit:
- The balance creeps up and never comes down. A “temporary” facility becomes permanent working capital.
- The limit is reviewed and reduced at an awkward moment.
- It’s used for long-term purchases that should have their own finance.
With a second mortgage:
- It’s used for an ongoing need and falls due before the need ends.
- The exit isn’t specific, so the loan drifts.
- The amount includes a buffer that would have been better as a separate line.
Can they work together?
Often the cleanest answer uses both. A second mortgage deals with a one-off problem, such as clearing an ATO debt, and a modest line of credit handles the regular monthly swings afterwards. That keeps the lump sum short and the line small, each doing the job it’s designed for.
An illustrative example
A landscaping business has strong spring and summer trade and a lean winter. Every year it runs short from May to August. It also has a one-off $90,000 ATO debt from a difficult year.
- A line of credit sized for the winter dip handles the recurring need.
- A lump sum, either unsecured or, if amounts and circumstances require, secured, clears the ATO debt with a defined repayment.
Using a single large second mortgage for both would leave the business paying for money it doesn’t need most of the year. Illustrative only.
For more on dips that come and go, see funding a cash-flow gap. For seasonal purchasing, see funding stock.
How should a line of credit be reviewed?
A line works best with a simple rule: the balance should return close to zero at least once in each cycle, whether that’s monthly, quarterly or seasonally. If it doesn’t, ask why. A rising floor, where the lowest balance each cycle is higher than the last, is an early sign the business is borrowing for something other than timing. Check the floor every quarter alongside your BAS, and talk to your accountant if it’s creeping up.
Get the shape right first
Tell us about the shape of your need, not just the amount, and one specialist will suggest the structure that fits: a line, a lump sum, or both. The enquiry takes about a minute and no credit check is run at that stage. Your details go to one person who works it through, not a panel of lenders. The more accurately you describe how cash moves through your business, the better the match.
Frequently asked questions
Is a line of credit cheaper than a second mortgage?
It depends on the facility and your circumstances. With a line, you generally pay for what you draw, which can be efficient for fluctuating needs. We don't quote rates; each facility is priced individually.
Can a line of credit be secured on my home?
Yes, some are. Larger limits are often secured on property. Smaller unsecured lines for trading businesses are sized on turnover and bank statements.
What's the biggest risk with a line of credit?
That it becomes permanent. If the balance never returns towards zero, the line is funding an ongoing shortfall, and the underlying problem needs attention.
Could I use a second mortgage now and a line of credit later?
Yes. Some owners use a second mortgage to clear a one-off problem, then set up a line of credit for ongoing working capital once the business is on a stable footing.