Mr says
Use a term loan when you need a set amount once, for something with a clear cost — equipment, a fit-out, a tax bill, a business purchase — and want a fixed repayment schedule. Use a line of credit when your need goes up and down: you get a limit, draw what you need, repay and draw again, paying mainly for what you use. Lumpy, recurring gaps suit a line of credit; one-off, defined purchases suit a term loan.
Key points
- A term loan pays out once and is repaid on a set schedule.
- A line of credit is a limit you draw, repay and draw again.
- Match the facility to the shape of the need, not the size alone.
- Lines of credit are for swings, not a permanent top-up to a loss-making business.
- Unsecured options
- Typically $5k – $500k
- Secured options
- $20k – $5m
- Line of credit
- Draw, repay, redraw
What’s the actual difference?
A term loan is the straightforward one. You borrow a fixed amount, it’s paid out once, and you repay it over an agreed term on an agreed schedule — weekly, fortnightly or monthly. When it’s paid off, it’s finished.
A line of credit is a limit rather than a lump sum. You draw money when you need it, repay when cash comes in, and draw again. It keeps going for as long as the facility runs. business.gov.au describes lines of credit simply as borrowing up to a specified limit as needed — which is exactly the point.
Mr’s shorthand: a term loan is a ladder — you climb it once to reach something. A line of credit is a trampoline — it’s there to catch the dips and bounce you back.
Which needs suit a term loan?
Term loans are for needs with a defined cost and a defined start:
- buying equipment, a vehicle or a fit-out;
- paying a large tax bill in one go;
- buying a business or a partner’s share;
- consolidating several debts into one repayment;
- a one-off project with a clear budget.
The fixed schedule is the feature, not a bug. You know exactly what’s coming out and when the debt ends.
Which needs suit a line of credit?
Lines of credit are for needs that come and go:
- customers who pay on 30, 45 or 60 days while wages are weekly — see what to do when customers pay late;
- stock you buy ahead of a busy period and sell through over weeks;
- seasonal businesses with strong months and quiet months — our page on borrowing for a seasonal business covers this;
- contracts with progress payments that arrive after the costs land.
The test: will the balance come back down regularly? If yes, a line of credit is doing its job. If the balance only ever goes up, the facility is covering a structural shortfall, and that needs a different fix.
How do they compare?
| Term loan | Line of credit | |
|---|---|---|
| Money paid out | Once, in full | As and when you draw |
| Repayments | Fixed schedule | Flexible, often with minimums |
| You pay for | The whole amount borrowed | Mainly what you’ve drawn |
| Ends | When the term finishes | When the facility ends or is renewed |
| Best for | Defined, one-off costs | Recurring, lumpy gaps |
| Watch out for | Borrowing for ongoing gaps | Treating it as permanent capital |
Costs for both depend on your circumstances, so Mr doesn’t quote rates. Do ask about establishment fees, line fees (for holding the limit), early repayment costs and any annual review fees — our page on what a business loan costs lists what to ask.
Two illustrative examples
A Perth wholesale business supplies hardware stores that pay on 45-day terms. Every month there’s a three-to-five-week gap between paying suppliers and getting paid. A line of credit sized on turnover covers the gap; the balance rises after supplier day and falls when debtors pay. It never sits at the full limit for long — a healthy sign.
The same business then wants a $160k forklift and racking upgrade. That’s a defined, one-off cost with a long useful life. A term loan suits it better — a fixed schedule spread over the life of the equipment rather than clogging the line of credit for years.
Both examples are illustrative; real amounts depend on turnover, statements and the lender.
What do lenders look at for each?
Much the same evidence: turnover, the conduct of your bank account, existing debts, your ATO position and how long you’ve been trading. For a line of credit, some lenders pay extra attention to how steady income is, because the balance can swing. For larger term loans, they’ll want to know exactly what the money buys and how it pays for itself. If you’re not sure how you’d read to a lender, the loan-readiness interview gives you Mr’s view in about two minutes.
The trap to avoid
The most common mistake Mr sees is a line of credit quietly becoming permanent. It starts as a buffer; a year later it’s maxed out and the business is paying for money it never pays back. If that’s happening, the conversation shifts to why — pricing, margins, a slow-paying customer, a loss-making product line — and possibly to converting the balance into a term loan with a clear end date.
How big should a line of credit be?
Big enough to cover your largest predictable gap, with a little room — not as big as a lender will allow. A simple way to size it:
- Look back over 12 months of bank statements.
- Find the lowest point your balance reached in each month, and the timing of your biggest outflows (wages, BAS, rent, suppliers).
- Identify the deepest gap between paying out and getting paid.
- Add a modest buffer for a late customer or an unexpected bill.
That figure is your working limit. Anything above it is money you’ll be tempted to use and pay to hold.
What does a healthy line of credit look like on a statement?
A balance that rises and falls in a rhythm that matches the business. For a wholesaler, it might peak after supplier day and clear when debtors pay. For a retailer, it might build before Christmas and clear in January. Lenders reviewing your facility at renewal want to see exactly that pattern. A balance pinned at the limit month after month tells a different story, and makes renewal or an increase harder to get.
Not sure which one you need?
Describe the need and Mr’s specialists will tell you which shape fits. Make a 60-second enquiry — say what the money is for and whether the need is one-off or recurring. There’s no credit check to enquire, your details aren’t spread around a list of lenders, and a real person calls to talk it through. Accurate turnover figures help the first call land on the right facility. See what you qualify for.
Frequently asked questions
Do I pay interest on the whole line of credit limit?
Generally you pay interest on what you've drawn, not the full limit, though some facilities carry a fee for having the limit available. Ask how both work before you sign.
Can I have a term loan and a line of credit at the same time?
Yes, and many businesses do: a term loan for a defined purchase and a line of credit to absorb day-to-day swings. The combined repayments still need to fit your cash flow.
Is an overdraft the same as a line of credit?
They're cousins. An overdraft lets your transaction account go below zero up to a limit. A line of credit is usually a separate facility you draw into your account. Both are revolving; the details differ by lender.
Which is easier to qualify for?
Neither is automatically easier. Lenders look at turnover, bank statement conduct and how steady your income is for both. A line of credit is sometimes sized a little more cautiously because the balance can move around.