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Term loan vs line of credit: What’s right for your business?

Choose the right loan to give your business the financial boost it needs.

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Whether to expand, get off the ground or just to provide a little support, many businesses need the help of a loan at some point. But while banks and lenders advertise their special rates and exclusive features, the most important thing to consider when choosing a loan is the type that will best suit your company. Here, we take a look at the two main options: a term loan and a line of credit.

Term Loan

Line of Credit

  • Fixed or variable rate of interest.
  • No repayment requirements.
  • Flexible repayment plans.
  • Option to increase the maximum loan amount.
  • Discounted rates.
  • Withdrawals can be made at any time.

Term loan

Providing a single, lump-sum payment, this is the most straightforward and most common loan available. You will have an agreed period of time in which to pay the loan back and will be required to pay interest on the entire loan amount even if you don't use it all. Once you have spent all the available funds, you’ll need to apply for a drawdown or start again with a new loan.

Features that come with a term loan

  • Fixed or variable rate of interest. Many banks will let you choose between a loan with a set interest rate and one that fluctuates with the market rate.
  • Flexible repayment plans. Some loans offer redraw facilities that allow you to choose exactly how much you pay back and when. Such features are often used as an incentive to go with a variable rate of interest.
  • Discounted rates. In return for paying interest on a sizable loan, lenders regularly offer discounts for a limited time.

Who is this type of loan suited to?

A term loan will suit the small business that has a clear figure it needs to cover outgoings over a fixed period. As a single amount, it’s useful for making specific purchases where the price is known in advance. Some kind of cash flow will still be necessary to cover interest and additional fees.

Line of credit loan

Also known as an equity loan, a business line of credit is similar to an overdraft facility as you only pay interest on funds that you use. Interest is paid monthly but there is no set time for when the loan needs to be fully repaid. Early and extra repayments are usually accepted with the option to redraw if the need arises.

What are the features of a line of credit loan?

  • No repayment requirements. As long as the account remains in good standing as per the terms of the account there is no set amount for monthly repayments.
  • Option to increase the maximum loan amount. The total funds available can be increased in line with the needs of your company.
  • Withdrawals can be made at any time. You're able to withdraw up to a daily or card limit at any time, making it a convenient option for business owners.

Who is this type of loan good for?

The flexibility and reflective interest payments with a line of credit loan make it a cheap and efficient way to finance a company for a short time. It can cover differences in income and outgoings produced by a variable payroll or increased expenses at a certain time of year.

Business loans you can apply for

Data indicated here is updated regularly
Name Product Min. Loan Amount Max. Loan Amount Loan Term Upfront Fee Filter Values
Prospa Business Loan
$5,000
300,000
3 months to 3 years
3% origination fee
Small business loans are available from $5,000 - $300,000 on terms of up to 3 years. At least six months trading history and a monthly turnover from $6,000 is necessary.
Valiant Finance Business Loan Broker
$5,000
1,000,000
3 months to 5 years
$0 application fee
A Business Lending Specialist from Valiant Finance can give you access to competitive business loans from over 70 lenders. Loans between $5,000 and $1 million are available. Request a call – your loan can be funded in 1 business day.
OnDeck Business Loans
$10,000
250,000
6 months to 2 years
3% of loan amount
Apply for up to $250,000 and receive your approved funds in one business day. Minimum annual turnover of $100,000 and 1 year of trading history required.
Max Funding Unsecured Business Loan
$2,000
300,000
1 month to 1 year
$0 application fee
An unsecured business loan from $2,000 that offers convenient pre-approval and no early repayment fees.
ANZ Secured Business Loan
$10,000
10,000,000
Up to 15 years
$600
Benefit from a low rate when you secure this loan with property and/or business assets. Loans from $10,000 available.
Westpac Business Loan
$5,000
1,000,000
1 to 30 years
$0 application fee
Purchase a new vehicle, equipment or support your cash flow with a business finance solution from Westpac.
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Data indicated here is updated regularly
Name Product Min. Loan Amount Max. Loan Amount Loan Term Upfront Fee Filter Values
Valiant Finance Business Loan Broker
$5,000
1,000,000
3 months to 5 years
$0 application fee
A Business Lending Specialist from Valiant Finance can give you access to competitive business loans from over 70 lenders. Loans between $5,000 and $1 million are available. Request a call – your loan can be funded in 1 business day.
Prospa Business Line of Credit
$2,000
100,000
Up to 1 year
$195 line activation fee
Get ongoing access to credit with a limit from $2,000 to $100,000 and a 12-month term.
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How can you get your company a loan?

The processes involved in finding approval for a term loan are simple. The lender will want historical evidence of successful cash flow and assurance of collateral, should your company be unable to repay the loan.

The prerequisites for a line of credit are similar but more stringent. Along with a written guarantee of repayment, lenders will provide a list of rules that must be kept in order to continue with the loan. These covenants will usually involve the company maintaining a certain net worth and not dropping below an agreed level of debt.

An alternate option

If your business has a few outstanding invoices, invoice financing can help manage your cash flow and get access to funds you need. It's a type of business loan that is secured by the unpaid invoices and comes with reduced risk, no asset requirements or interest payments.

Compare invoice financing products below.

Data indicated here is updated regularly
Name Product Min. Loan Amount Max. Loan Amount Loan Term Upfront Fee Filter Values
Timelio Invoice Finance
$10,000
100,000,000
Up to 4 months
$0
Get up to 100% of the value of your invoices without having to wait for customer payments, and with no minimum turnover or operating history required.
Scottish Pacific Invoice Finance
$200,000
100,000,000
From 1 year
No set amount
Improve your business cash flow by financing your outstanding invoices. No minimum trading history required, but minimum 12 - month term and $200,000 in invoices.
Key Factors Selective Invoice Finance
$0
3,000,000
From 1 day
$0
Get access to funds in 4 hours. Pay as you use with no minimum, up to 80% advance on invoices, no lock-in contract and transparent fees.
Note: Must have annual sales turnover between $500,000 and $30 million.
BCashflow Positive Invoice Finance
$100,000
3,000,000
From 1 year
$0
Get funded up to 90% of the invoice in 4 hours. No hidden fees, 1.8% of the invoice for the first 30 days, and 0.06% per day after. Note: Suitable for businesses with monthly turnover between $100,000 and $3,000,000.
Scottish Pacific Selective Invoice Finance
$10,000
1,000,000
1 to 3 months
$500
Finance your unpaid invoices on demand with terms of 1 - 3 months. 95% of invoice is paid upfront, with no minimum trading history required.
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Picture: Shutterstock

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