Two of the most common business finance products in Australia are the term loan and the line of credit. They both provide access to capital — but they work very differently, cost differently, and suit different business needs.
Business Term Loan: How It Works
A term loan provides a lump sum upfront, which you repay over a fixed period (usually 1–10 years) with regular repayments of principal and interest.
Key features:
- Fixed loan amount
- Regular repayment schedule
- Interest charged on the full balance (reducing as you repay)
- Often secured (against property or assets)
- Best for one-time capital needs: equipment purchase, business acquisition, renovation
Line of Credit: How It Works
A line of credit gives you access to a pre-approved pool of funds. You draw down as needed, repay when cash flow allows, and redraw again. You only pay interest on what you've actually drawn.
Key features:
- Flexible drawdown — use some or all of the facility
- Interest only on drawn balance
- Typically an annual fee (whether used or not)
- May be secured or unsecured
- Best for ongoing cash flow management: covering payroll during slow periods, funding seasonal stock, bridging invoice gaps
Key Differences
| Feature | Term Loan | Line of Credit |
|---|---|---|
| Funds structure | Lump sum once | Draw down / repay / redraw |
| Interest on | Full balance (reducing) | Drawn balance only |
| Repayments | Fixed schedule | Flexible (often interest only) |
| Best for | One-off capital spend | Ongoing cash flow |
| Rate | Often fixed | Variable |
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Cost Comparison
For a $100,000 facility at a 9% rate:
Term loan (3 years): Monthly repayments of ~$3,180. Total interest: ~$14,480.
Line of credit (fully drawn for 3 years): Interest of ~$9,000/year = $27,000 over 3 years, plus an annual line fee of $500–$1,500.
If you only draw 50% of the line of credit, total cost drops to ~$13,500 — competitive with the term loan. The line of credit becomes more valuable the more selectively you use it.
Which Is Right for You?
Choose a term loan if:
- You have a specific, one-off purchase (equipment, fit-out, acquisition)
- You want predictable, fixed repayments for budgeting
- You're comfortable with the full amount being drawn immediately
Choose a line of credit if:
- You have seasonal or irregular cash flow
- You want a safety net for unexpected expenses
- You don't always need the full amount at once
- You want flexibility to repay quickly when cash flow is strong
Can You Have Both?
Many growing businesses use both: a term loan for a specific capital investment, and a line of credit for ongoing working capital. A broker can help you structure these to minimise cost and avoid over-leveraging.
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