Most business owners who come to us asking for “a loan” actually need one of two different products, and the wrong one costs real money. A term loan hands you a lump sum and a fixed repayment schedule. A line of credit gives you a limit you can draw on, repay and draw on again, paying only for what you use. Both are unsecured, both are fast, and both are on our panel. This guide explains how each works, what each really costs, and a simple rule for choosing between them.
The two products in one sentence each
- A business term loan is a fixed amount, paid out in full on day one, repaid in equal instalments over a set term, typically 3 to 36 months.
- A business line of credit is an approved limit, typically $10,000 to $500,000, that sits available to you; you draw what you need, pay interest only on the drawn balance, and the limit refills as you repay.
Side by side
| Feature | Term loan | Line of credit |
|---|---|---|
| How funds arrive | Lump sum, once | Draw any amount up to the limit, any time |
| Repayments | Fixed, weekly or daily, for the whole term | Vary with the balance; minimums are usually interest plus a small principal portion |
| What you pay for | The full amount from day one | Only the drawn balance, plus any line or annual fee |
| Pricing | Usually a factor rate (fixed total cost) | Usually an interest rate or monthly fee on the drawn balance |
| Term | Fixed; ends when repaid | Revolving; reviewed annually or every two years |
| Best for | One-off, known purchases and projects | Recurring, variable cash flow gaps |
| Main risk | Borrowing more than you needed and paying for the lot | Treating the limit as income and never clearing it |
When a line of credit is the right tool
A line of credit earns its keep when the amount you need keeps changing. The classic cases:
- Slow-paying customers. You invoice on 30-day terms, get paid on day 55, and have wages due on day 14. The line covers the gap, and you clear it when the invoice lands.
- Seasonal dips. A trades business that goes quiet over January, or a retailer that stocks up in October and sells through December, draws for a few weeks and repays in the strong months.
- Opportunistic buying. A supplier offers 15% off for a bulk order this week. Drawing $20,000 for six weeks and paying a few hundred dollars for the privilege is a good trade.
- A standing buffer. Many owners keep an approved line they rarely touch, because the time to arrange finance is before the emergency, not during it.
The common thread is that the money is in and out. If you would draw the full limit on day one and still have most of it owing a year later, you do not need a line; you need a loan, and the line will cost you more for the same borrowing.
When a term loan is the right tool
A term loan is built for a defined purpose with a defined price tag: a fit-out, a vehicle, a second location, a piece of equipment, a marketing push with a known budget, or consolidating a few expensive facilities into one. You know the amount, you know roughly how long it will take to pay back, and you want the certainty of the same repayment every week until it is gone. For a project like that, a term loan is almost always cheaper per dollar borrowed than running the same amount on a line, because lenders price a fixed, fully drawn exposure more keenly than an open limit they must keep available.
If the purchase is a specific asset, it is also worth reading equipment finance versus a business loan; where the asset itself can secure the finance, the rate drops again.
The cost comparison most people get wrong
The mistake is comparing a $50,000 loan with a $50,000 line as if they were the same borrowing. They rarely are. Take a business that needs about $10,000 for two weeks every month to cover a timing gap:
- With a $50,000 term loan at a 1.15 factor rate over 12 months, the business repays $57,500 regardless of how much of the $50,000 it ever used. Total cost: $7,500, for money that sat idle most of the year.
- With a $50,000 line of credit drawn to $10,000 for half of each month, the average balance is around $5,000. Even at an interest rate of 20% p.a. plus a line fee of, say, $500 a year, the annual cost is roughly $1,500. Total cost: about a fifth of the loan.
Now flip the use case. A business that borrows $50,000 for a fit-out and keeps the full balance owing for a year pays roughly $10,000 or more on a 20% line, plus the fee, against $7,500 on the loan, and the line will likely be reviewed or reduced along the way. Same limit, opposite answer. The product that wins depends entirely on how long the money stays out.
Two things to watch on any line of credit quote: whether there is a fee on the undrawn limit (some lenders charge for availability, some do not) and whether the quoted rate is per annum or per month. Our factor rate versus interest rate guide explains how to put any two offers on the same footing, and the repayment calculator will show you the true weekly cost of a term loan for your numbers.
Qualifying for each
The assessment is similar: active ABN, trading history, monthly turnover read from bank statements, and a credit file without recent unpaid defaults. Two differences in practice. Lines of credit tend to want a slightly longer trading history (twelve months is the common floor) and a steadier deposit pattern, because the lender is committing to keep a limit available rather than funding one known amount. And the limit on a line is reviewed periodically, so a business whose turnover drops can find the limit trimmed at renewal. Term loans, once funded, are yours for the term regardless of what happens next.
Loan size and line limits are both set from turnover, using the same multiples; how lenders size an unsecured business loan covers the maths, and the borrowing power calculator gives you a quick range.
Can you have both?
Yes, and it is a common structure once a business has a year or two behind it: a term loan for the growth project and a modest line for the day-to-day timing gaps. The thing to avoid is the reverse, where a line of credit quietly becomes a permanent loan at a higher price. If you notice the balance on your line has not been near zero for three months, that is the signal to refinance the stuck portion into a term loan and restore the line to its real job.
A simple decision rule
If you can write down the amount and what it is for, take a term loan. If the honest answer is “it depends on the month”, take a line of credit. If you are unsure, it usually means the need is a mix of both, in which case a smaller loan plus a smaller line will beat one large facility of either kind.
Next step
You can read more about our business line of credit and fast business loans, or skip straight to the free eligibility check: one minute, no credit score impact, and we will tell you which product and which lenders on our panel suit the way your cash flow actually moves.