Quick answer
A term loan pays one lump sum that you repay in fixed instalments until the balance hits zero, which suits a one-off cost such as equipment, a fit-out or an acquisition. A line of credit gives you a limit to draw, repay and redraw, with interest only on what you use, which suits recurring gaps in cash flow. Many businesses end up using both, each for its own job.
Key points
- A term loan is built to disappear on a set date; a line of credit is built to be reused
- Fund long-life purchases with a term loan and short, repeating gaps with a line
- Lines often carry a fee on the full limit, so an unused line still costs money
- Lines are reviewed periodically and can be reduced or switched to a paydown, while a term loan stays put if you meet its terms
- Using a line for a long-life asset tends to leave a balance that never comes down
- Term loan structure
- One drawdown, fixed instalments
- Line of credit structure
- Revolving limit, draw and repay
- Typical unsecured size
- $5k to $500k, scaled to turnover
- Larger amounts
- Usually need property security
Take two bills a joinery business might face in the same month. The first is $14k of wages that falls due a fortnight before a builder pays a $40k progress claim. The second is $95k for a CNC router that will cut panels for the next eight years. Both are “needing money”, but they’re different problems, and most of the trouble owners get into with these two products comes from funding one kind of problem with the other kind of debt.
How do the two work?
With a term loan you get a single amount, paid out once, then repaid in equal instalments over an agreed period. Each payment covers interest and chips away at the balance. On the final date, the debt is gone.
A line of credit works more like a reservoir. The lender approves a ceiling; you take out whatever the week demands, top it back up as customers pay, then take out more later. The government’s business portal frames it as a facility capped at an agreed amount, and interest is charged only on the portion in use. The facility stays open until the lender reviews it or you close it.
| Fixed-term lump sum | Revolving facility | |
|---|---|---|
| How money arrives | In one payment at the start | In pieces, whenever you choose |
| Repayment | Fixed instalments to zero | Flexible, within minimums; balance can go back up |
| Interest charged on | The outstanding balance | Only the drawn amount |
| Fees | Establishment, sometimes early payout | Establishment plus, often, a line fee on the full limit |
| Lifespan | Ends on a fixed date | Open-ended, subject to periodic review |
| Best match | A one-off cost with a long payback | Repeating, short timing gaps |
| Discipline built in | Yes, the balance must fall | Only what you impose yourself |
The asset-life test
The simplest way to choose: ask how long the thing you’re paying for keeps earning.
- Years (a router, a fit-out, a delivery van, buying out a partner): fixed instalments make sense, via a term loan or a purpose-built option such as equipment finance. The repayments then line up with the income the asset produces.
- Weeks (wages before a claim is paid, stock before a busy month, a BAS instalment before a big invoice clears): use a line. You draw it, the money comes back, the line is free again.
In the joinery example, the CNC router belongs on a term loan or equipment facility. The wage gap belongs on a line. Putting the router on the line would soak up most of the limit for years, leaving nothing for the very timing gaps the line was meant to cover.
Our cash flow gap calculator helps size a line properly; the repayment calculator shows what a term loan instalment looks like.
What does an idle limit cost?
This is where lines surprise people. Many lenders charge a line fee, sometimes called a limit or facility fee, on the whole approved amount whether you draw it or not. A $100k line that sits mostly unused can still cost hundreds or thousands of dollars a year in fees alone.
That doesn’t make lines bad value. A line you draw a few times a year and clear quickly is often very cheap insurance against a cash crunch. But if you’re applying for a $150k line “just in case” and realistically only ever need $40k, a smaller limit will usually cost less. Read our explanation of the line fee before comparing quotes.
A term loan has the opposite profile. Interest accrues on every dollar the moment it lands, including any portion that sits untouched in the account for months. Borrowing a large lump sum before you need it is its own version of paying for idle money.
Want a hand working out the split? Tell us what you’re funding and someone will talk it through.
The renewal question nobody asks at the start
A term loan, once drawn, is yours for the term as long as you keep to the contract. A line of credit is different. Lenders review lines, often annually, and can lower the limit, decline to renew, or move the balance onto a fixed paydown.
For bank customers, the 2025 Banking Code of Practice sets out notice obligations for small business lending, including advance notice of unfavourable changes and at least three months’ notice before a bank decides not to extend a facility that won’t be repaid by its regular instalments. Non-bank and fintech lines aren’t covered by that code, and their review terms vary widely. Some treat each drawdown as its own mini-loan with weekly repayments over a set number of months.
The practical risk: a business that’s leaning on a fully drawn line can find that a quiet quarter triggers a reduced limit at exactly the wrong moment. If your line has been fully drawn for a year, it has quietly become term debt, and converting it to an actual term loan may be the safer move.
When does each one win?
A term loan is the better choice when:
- You’re paying for something with a long useful life.
- You want certainty: a fixed number of payments and a known end date.
- The sum is big compared with annual sales and needs several years to clear.
- You’ve been rolling a line at its limit and want to lock the balance into a plan that clears it.
A revolving line has the edge when:
- Money goes out before it comes in, over and over, in a fairly predictable rhythm.
- The amount you need changes month to month.
- You want a buffer in place before trouble arrives rather than applying in a hurry.
- Your customers settle invoices a month or two after delivery and the wait hurts. (Invoice finance is worth comparing here too.)
How banks and non-banks fit in
Banks offer both products and, for businesses that meet their criteria, are often the most affordable source. Larger bank lines are frequently secured against property. If your bank offers a line or term loan at a sensible price, take it seriously.
Where banks often hesitate is newer businesses, a recent tax debt or uneven bank statements. Non-bank lenders fill much of that space with unsecured lines and term loans sized on turnover, typically from $5k up to around $500k for established businesses. If you’d rather compare the two kinds of revolving facility, our overdraft vs line of credit page goes further, and short-term vs long-term loans covers the term question.
A five-question check
- Will this money come back within weeks, or be paid off over years?
- Will I need it again after it’s repaid?
- Could my cash flow handle a fixed weekly or monthly instalment?
- What would the line fee cost if the limit sat unused for six months?
- What happens to my business if the lender cuts the limit at the next review?
If questions one and two point to “years” and “no”, you want a term loan. If they point to “weeks” and “yes”, a line is the tool.
Not sure which job your money is doing?
Most owners we speak with have a bit of both: something to buy and a cash cycle that pinches. Sorting out how much belongs on fixed instalments and how much on a revolving limit is a big part of what our team does.
It’s about sixty seconds to send an enquiry, and your credit report isn’t looked at just because you asked. Your enquiry isn’t fired off to every lender in the country; one of our team reads it properly, then rings you. Be straight with us about the purpose and the way cash flows in and out during a typical month, because that accuracy is what lets us suggest a sensible split on the first call.
Frequently asked questions
Is a line of credit cheaper than a term loan?
It depends how you use it. On a line you pay interest only on the drawn balance, so a facility that's used briefly and cleared quickly can cost very little. But line fees apply to the whole limit, and a line that stays fully drawn for years can cost more than a term loan for the same amount. Compare total dollars over your expected usage.
Can I use a line of credit to buy equipment?
You can, but it's usually a poor match. Equipment earns its keep over years, while a line is meant to be cleared and reused. Equipment finance or a term loan spreads the cost over the asset's working life and leaves the line free for cash flow gaps.
Can a lender cancel my line of credit?
Lines are reviewed periodically, and the lender may reduce the limit, decline to renew or convert the balance into a fixed repayment schedule. Under the Banking Code of Practice, banks give small business customers notice before making unfavourable changes. Non-bank contracts vary, so read the review clause.
Which is easier to get approved?
Unsecured versions of both are assessed in a similar way: bank statements, turnover, time trading and credit history. Some lenders are more cautious with lines because the balance can rise again after being repaid, so a new business may find a small term loan easier to obtain first.
Can I have both a term loan and a line of credit?
Yes, and many established businesses do. A common setup is a term loan for a fit-out or acquisition and a modest line for wages and stock timing. Lenders will look at total repayments across both facilities when assessing whether you can afford them.