Line of credit or term loan? Our verdict

Both are ways to borrow for your business. They behave very differently once you have the money, and choosing the wrong one for the job is one of the most common borrowing mistakes we see.

How does each one work?

A business line of credit gives you an approved limit. You draw what you need, repay it, and draw again. Business.gov.au describes lines of credit in its funding options guide as borrowing up to a set limit. Repayments are generally based on what you’ve drawn, and there may be fees on the limit itself.

A term loan gives you a lump sum up front, repaid over a fixed term on a set schedule. Once it’s repaid, it’s done. If you need more, you apply again.

How do they compare?

Test	Line of credit	Term loan
How you receive funds	Draw as needed, up to a limit	Lump sum up front
Repayments	Based on the drawn balance	Fixed schedule
Reuse	Yes, as you repay	No, apply again
Best for	Stock, seasonal swings, contract gaps	Equipment, fit-outs, acquisitions, refinancing
Discipline	Up to you	Built in
Main risk	Balance creeping into permanent debt	Paying for funds you no longer need
Fees to watch	Limit or line fees, even when undrawn	Establishment and early payout fees

Our verdict

The line of credit wins when the need comes and goes. If you’ll need money for six weeks each spring and then not again until autumn, a term loan would have you paying for a lump sum that sits idle most of the year. A line of credit costs you mainly when you use it.

The term loan wins when the need is once and the payback is long. Paying for a fit-out over several years with a line of credit tends to leave a stubborn balance sitting on the facility, eating the flexibility you took it out for. A term loan pays the fit-out off by a fixed date, and the line stays free for genuine swings.

Our business line of credit verdict covers the product in detail. To see which ranks higher for your situation, try the Loan Finder or get a specialist’s view.

Illustrative example: one business, two facilities

Illustrative only. A café group with two sites wants to open a third. It also has a pattern of quieter winters, when takings drop and wages don’t.

• The new site’s fit-out and equipment go on a term loan and equipment finance: one-off costs with a payback over several years.
• The winter dip is covered by a modest line of credit, drawn in June and July and repaid through spring and summer.

Mixing the two would have gone badly either way: a line of credit stuck at its limit with fit-out debt, or a term loan for a winter shortfall that only lasts a couple of months.

Verdict for this group: both, each for its own job.

How do you spot a mismatch?

You’ve probably got the wrong structure if:

• Your line of credit hasn’t been near zero in a year. It’s become a term loan without the schedule. Consider refinancing the stuck portion to a term loan.
• You took a term loan “just in case” and the money is sitting in your account. You’re paying for funds you aren’t using.
• You keep reapplying for small term loans for the same seasonal need. A line of credit would save the repeated setup.

Business.gov.au’s cash flow tips are worth reading before you set a limit: faster collections and leaner stock can shrink the facility you need.

For specific uses, see funding peak-season stock, funding a big contract and the best loan for a slow quarter.

Can a term loan include a redraw?

Some term loans allow you to pay ahead and redraw extra repayments later. That adds a little line-of-credit flexibility to a structured loan. It’s useful for businesses that want the discipline of a term loan but like having access to money they’ve paid in early. Check whether redraw is available, whether it has fees, and whether the lender can limit it.

What do lenders look for in each?

For a line of credit, lenders focus on the pattern of your cash flow: regular deposits, how often you’d draw and repay, and how the business has handled swings before. For a term loan, they focus on the purpose, the payback and whether repayments fit comfortably. Either way, clean bank statements and an honest purpose make the decision easier.

Which one fits your business?

If you can describe the need, we can match the structure. Start your enquiry and tell us whether it’s a one-off cost or something that comes around again.

Enquiring won’t trigger a credit check, and your details won’t be distributed among a crowd of lenders. Be clear about how your cash flow moves through the year; it’s the single most useful thing for getting this choice right.