Business loan or line of credit: matching the facility to the need

The term loan's defining feature is its finish line. Amount, term and repayment schedule are fixed at the start, every repayment carries the balance downward, and the debt has a scheduled extinction date. That predictability is the product: you know the commitment, you can budget around it, and the discipline of amortisation is built in rather than left to willpower. For funding a defined purchase, that certainty is usually exactly what a business wants from its debt.

The line of credit's defining feature is elasticity. The approved limit is capacity, not debt — nothing is owed until you draw, and in general terms interest accrues only on the drawn balance, though limit or service fees may apply either way. Repayments restore your available headroom, and the facility rolls on subject to periodic review rather than marching to a payoff date. That flexibility is its product — and, unmanaged, also its trap.

Picture a physiotherapy practice moving to larger rooms. The fit-out — partitions, treatment spaces, reception, signage — is a one-time expenditure with a knowable total, and the benefit unfolds over many years of trading from the new premises. Funding it with a term loan matches the cost to that benefit: the practice repays steadily over years while the rooms generate the revenue, and the debt retires while the fit-out is still earning.

Run the counterfactual and the logic sharpens. Funding a fit-out from a line of credit parks a large, static balance on a facility designed for movement — the balance never cycles, the review dates keep arriving, and flexibility you are paying for goes unused. The tell for term-loan territory is a need you can describe in the past tense once it is met: we bought the fit-out, we acquired the competitor's client list, we bought out the retiring partner. Spend once, amortise once.

Now picture a wholesaler supplying homewares to retailers. Every winter it builds inventory ahead of the spring selling season, paying suppliers months before retailers pay their invoices. The gap is real, recurring and temporary — it opens as stock builds and closes as receivables collect. A line of credit is purpose-built for it: draw through the buildup, repay through the collection months, sit near zero in the quiet season, repeat next year.

A term loan is the wrong tool here, in either direction. Borrow the peak requirement as a lump sum and the wholesaler pays interest on idle funds for most of the year; borrow and repay a fresh loan each season and it is re-applying forever. The tell for revolving territory is a need described in the present continuous tense: we are always bridging the gap between paying suppliers and being paid. If the gap is specifically locked in unpaid invoices, invoice finance — which advances against receivables directly — is a cousin worth knowing about.

Each structure has a characteristic failure mode. The term loan's is mismatch: borrowing a lump sum for a need that turns out to be fluctuating, leaving you paying interest on money sitting idle in the account. The line of credit's is the evergreen balance: a 'temporary' drawing that never cycles back down and quietly becomes permanent debt — a term loan in disguise, minus the amortisation discipline, often at flexible-money pricing. If your line has sat near its limit for a year, it is telling you it wants to be a term loan.

Beyond structure, compare honestly: pricing conventions differ between the two in general terms, fee patterns differ, and security expectations range from unsecured to property-backed on both. Many businesses rightly run one of each — a term loan for the lumpy investments, a modest line for the working-capital rhythm. The assistant on this page can sketch indicative repayments and structures for your situation in minutes, and a finance specialist reviews the shape of the need before anything is recommended; your accountant is the right voice on what your cash-flow cycle really looks like.