Business Loan or Line of Credit? How to Stop Guessing and Actually Choose
Term loans are cheaper when you know the spend. Lines of credit are more expensive but flex with unpredictable cash needs. Here's the real cost gap and a decision framework.
Business Loan or Line of Credit? Here's How to Stop Guessing and Actually Choose
Most Australian business owners pick one based on what their bank offers first — not what actually fits their situation. Here's the honest answer: a business loan is cheaper and cleaner when you know exactly what you need the money for; a line of credit is more expensive but genuinely useful when your cash needs are unpredictable. The difference in total cost on a $250,000 facility can exceed $30,000. Choose wrong and you pay for it.
The Core Difference in Plain English (Lump Sum vs Revolving Tap)
A term loan works like a mortgage. You borrow a fixed amount, receive it as a lump sum, and repay it — principal plus interest — in regular instalments over an agreed term. Once it's repaid, it's done. The facility closes.
A line of credit (also called a revolving credit facility) works like a tap. The lender approves a limit — say $150,000. You draw what you need, when you need it, repay it, and draw again. You only pay interest on what you've actually drawn.
The practical difference is significant:
- Term loan: Borrow $250,000 → pay interest on $250,000 from day one → repay monthly until zero
- Line of credit: Approved for $250,000 → draw $40,000 for wages → pay interest only on $40,000 → repay → draw again next month
If your $250,000 line of credit sits mostly unused, your interest bill is tiny. If you draw it fully and leave it drawn, you'll pay more than a term loan at the same headline rate.
The Real Cost Difference: Why the Rate Gap Matters Right Now
This is where most comparisons go soft. Here are the actual numbers.
Typical rates in Australia (May 2026):
| Product | Rate range |
|---|---|
| Business term loan (secured) | 7.99%–12% p.a. |
| Business term loan (unsecured) | 12%–18% p.a. |
| Business line of credit | 14%–22% p.a. |
Named line of credit rates (May 2026):
| Lender | Rate from |
|---|---|
| Dynamoney | 14.55% p.a. |
| Shift | 14.95% p.a. |
| Lumi | 15.50% p.a. |
| ANZ | 15.95% p.a. |
| NAB | 16.00% p.a. |
Why the gap exists: Revolving credit is riskier for lenders. They're committing capital to a facility you can draw and redraw indefinitely, with no fixed repayment schedule that forces the balance down. They price that flexibility accordingly.
Worked example — $250,000 term loan at 12% over 3 years:
- Monthly repayment: ~$8,300
- Total interest paid: ~$48,000
- Total repaid: ~$298,000
Run the same $250,000 through a line of credit at 16% p.a. drawn at full capacity for 3 years and you'd pay closer to $120,000 in interest — more than double.
The cash rate factor: The RBA raised the cash rate to 4.35% in May 2026, reversing the 2025 easing cycle. Lines of credit are almost always variable rate products. That means they reprice upward whenever the cash rate moves. Term loans — particularly fixed-rate ones — lock your rate at drawdown. In a rising rate environment, that certainty has real value.
Decision Framework: 5 Questions to Find Your Answer
Run through these in order. The answer usually becomes clear by question three.
1. Do you know exactly how much you need? If yes — a term loan. You've defined the need, borrow precisely for it, and stop paying interest once it's repaid. If no — a line of credit. You're covering an unknown quantum of future expenses.
2. Is this a one-off or recurring need? Equipment purchase, fitout, or acquisition: one-off → term loan. Wages, stock top-ups, invoice gaps: recurring → line of credit.
3. Do you have strong, predictable cash flow to manage variable drawdowns? A line of credit requires discipline. If your revenue is lumpy or unreliable, drawing on a revolving facility and not repaying it compounds quickly. Businesses with predictable monthly revenue (SaaS, subscriptions, contract retainers) manage lines of credit well. Businesses with seasonal or volatile revenue often find themselves carrying a permanently drawn limit at 16%+ p.a.
4. What's your time horizon? Less than 12 months: a line of credit is often more flexible. 12 months or longer: a term loan with a fixed schedule usually costs less and creates repayment discipline.
5. Do you have security available? Secured term loans start from 7.99% p.a. Unsecured lines of credit start from 14.55% p.a. If you can offer a business asset or property as security, the cost difference shifts decisively in favour of a secured term loan for any large, defined purchase.
When a Business Loan Wins (With Worked Examples)
Buying equipment You need a $120,000 CNC machine. The cost is fixed, the asset has a useful life of 7 years, and you can match loan repayments to the revenue the machine generates. A 5-year secured term loan at 9% p.a. gives you ~$2,490/month in repayments. Total interest: ~$29,400. Clean, predictable, and the loan is gone when the asset is half-depreciated.
Shopfront fitout $80,000 fitout for a hospitality venue. You're not going to need to "redraw" a fitout. Borrow $80,000, repay over 3 years, done.
Acquisition Buying a competitor's client list or another business. You know the price, you have a settlement date, you need the money in full on a specific day. Term loan.
Refinancing existing debt Consolidating two high-rate unsecured loans into one lower-rate secured term loan. You need a specific payoff amount, not a revolving facility.
When discipline matters Some business owners use a term loan specifically because it forces repayment. A line of credit doesn't amortise — you can let the balance sit indefinitely. If you lack the cash flow discipline to aggressively repay a revolving facility, a term loan's forced structure protects you from yourself.
When a Line of Credit Wins (With Worked Examples)
Managing seasonal cash flow A surf school makes 70% of revenue October–March. Between April and September, wages and rent still need to be paid. A $60,000 line of credit drawn progressively through winter and repaid from summer revenue is far cheaper than a term loan sitting fully drawn.
Covering payroll during invoice payment gaps A B2B services business invoices $200,000 in March with 30-day terms. Payroll is due in two weeks. Draw $50,000 from the line of credit to cover wages, repay 28 days later when the client pays. Interest cost: $50,000 × 16% ÷ 365 × 28 days = ~$615. Infinitely cheaper than a term loan structured for a $50,000 need that only lasts 28 days.
Unpredictable expenses A plumbing company needs to replace a van at short notice, or pre-order stock when a supplier has unexpected availability. These needs can't be anticipated in a term loan drawdown. A line of credit means you act immediately, without a new application.
Buying stock opportunistically A retailer gets a supplier offering 30% off on bulk stock with 7 days to commit. A standing line of credit means you can move. A term loan requires a fresh application, credit assessment, and 5–10 business days minimum.
The Hybrid Approach: Using Both Together
Most growing businesses don't pick one — they use both, for different purposes.
The setup:
- A secured term loan for the specific capital event: equipment, fitout, acquisition, property deposit
- A line of credit as a working capital buffer for cash flow timing mismatches
How it works in practice: A restaurant group borrows $400,000 as a term loan to fund a new venue fitout, repayable over 4 years at 10% p.a. Simultaneously, they hold a $75,000 line of credit at 15.5% for managing the gap between supplier invoices and revenue ramp-up in the new venue's first 6 months. Once trading stabilises, the LOC gets repaid and sits at zero — an insurance policy that costs nothing while undrawn.
The rule: use the term loan for the asset, use the line of credit for the timing. Don't fund a fitout on a line of credit (you'll never pay it down) and don't use a term loan for payroll (you'll overpay interest on money you only needed for 3 weeks).
Comparison Table: Business Loan vs Line of Credit Side by Side
| Feature | Business Term Loan | Business Line of Credit |
|---|---|---|
| Interest rate | 7.99%–18% p.a. | 14%–22% p.a. |
| Structure | Fixed lump sum, set repayment schedule | Revolving limit, draw/repay/redraw |
| Access to funds | Once, at drawdown | Ongoing, up to approved limit |
| Interest calculation | On full outstanding balance | On drawn balance only |
| Rate type | Often fixed | Usually variable |
| Security | Secured or unsecured | Usually unsecured |
| Flexibility | Low (set schedule) | High (draw when needed) |
| Best use case | Defined capital purchase, one-off event | Ongoing working capital, seasonal cash flow |
| Typical amounts | $2,000–$2m+ | $5,000–$1m |
| Minimum turnover | Often $5,000/month | Often $10,000/month |
| Min ABN age | 6 months (non-bank); 12+ months (bank) | Often 12 months |
What Lenders Require for Each Product (Eligibility Differences)
The approval criteria are different — and lines of credit generally have higher bars.
Term loans:
- ABN: 6 months minimum (non-bank lenders); 12+ months for most bank products
- Minimum monthly revenue: often $5,000/month
- Bank statements: 3–6 months
- No ATO debt issues (or a plan to clear them)
- Secured term loans require the asset or property as collateral
Lines of credit:
- ABN: often 12 months minimum — lenders want to see at least one full trading cycle
- Minimum monthly revenue: often $10,000/month — lenders need evidence the business generates enough to service variable draws
- Bank statements: 6–12 months
- Higher scrutiny on revenue consistency — lumpy or declining revenue is a red flag for revolving facilities
- Both unsecured lines of credit and overdrafts require demonstrably clean bank statement history
Both products:
- No unresolved ATO debt (payment plans are generally acceptable if disclosed)
- No recent defaults or judgements
- Australian business, Australian bank account
If you're a newer business — under 12 months ABN — a term loan from a non-bank lender is your most accessible option. A line of credit almost always requires a longer operating history.
Tax and Accounting Treatment (Interest Deductibility)
Interest on both products is generally tax deductible for your business, provided the funds are used for business purposes. The ATO's position is clear: if borrowing is wholly for income-producing activity, 100% of interest is deductible.
The mixed-use problem with lines of credit: A line of credit is easy to misuse. If you draw from a business LOC to cover a personal expense — a family holiday, a home renovation — that portion of interest is not deductible, and it complicates your bookkeeping. With a term loan, the funds go to a defined business purpose and there's rarely any ambiguity.
Accounting treatment:
- Term loan: treated as a liability on the balance sheet, principal repayments are not P&L expenses (only interest is)
- Line of credit: same treatment — the drawn balance is a liability, interest is expensed
If your LOC is partially personal and partially business, you need to track each draw, calculate the apportioned interest, and claim only the business portion. This is manageable but requires discipline. A dedicated business-only LOC avoids the problem entirely.
LoanGorilla's Picks: Best Business Loans and Best Lines of Credit in Australia
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Frequently Asked Questions
What is the main difference between a business loan and a line of credit?
A business term loan gives you a fixed lump sum that you repay on a set schedule — once repaid, the facility closes. A line of credit is a revolving limit you draw from, repay, and draw again, paying interest only on what you've drawn. Term loans are cheaper (from 7.99% p.a.); lines of credit are more flexible but more expensive (from 14.55% p.a. in May 2026).
Is a line of credit more expensive than a term loan?
Yes, consistently. Term loan rates in Australia run 7.99%–18% p.a. depending on security and lender. Lines of credit run 14%–22% p.a. The gap exists because revolving facilities are riskier for lenders — there's no amortising repayment schedule forcing the balance down. On a $250,000 facility held for 3 years, the cost difference can exceed $30,000–$70,000 depending on how much of the limit you draw.
Can I pay off a business line of credit at any time?
Yes. Most lines of credit allow full or partial repayment at any time without penalty. Repaying reduces your drawn balance and therefore your daily interest accrual. Check whether your facility has a minimum monthly payment — some require interest-only payments on the drawn balance even if you don't want to reduce principal.
What happens if I don't use my line of credit?
If the drawn balance is zero, you pay no interest. Some lenders charge a small facility fee or line fee (typically 1%–2% p.a. on the approved limit, not the drawn balance) to keep the credit available. Read the product disclosure carefully — a $200,000 line of credit with a 1.5% annual facility fee costs you $3,000 per year even if you never draw a cent.
Can I convert a term loan to a line of credit?
Not directly. These are separate products with different structures, and lenders don't typically convert between them. You would need to repay the term loan (or refinance it) and apply for a new line of credit facility. Some lenders allow simultaneous term loan and LOC products — ask specifically whether the lender offers both and whether they can be structured together.
Is a business overdraft the same as a line of credit?
They're very similar in structure — both are revolving, both charge interest only on the drawn balance — but an overdraft sits attached to your business transaction account, while a line of credit is typically a separate facility. Bank overdrafts tend to be lower limits (under $50,000) and have higher rates than standalone lines of credit from non-bank lenders. Non-bank lines of credit also have faster approval timelines.
Do I need collateral for a business line of credit?
Most business lines of credit in Australia are unsecured — lenders assess your revenue and bank statement health rather than requiring property or asset security. The trade-off is higher rates (14%–22% p.a.) versus secured term loans (from 7.99% p.a.). Some lenders will accept a general security agreement (GSA) over business assets to reduce the rate on a line of credit.
How does interest work on a revolving line of credit?
Interest accrues daily on your drawn balance only. If your approved limit is $100,000 and you draw $20,000, you pay interest on $20,000. At 15.5% p.a., that's $20,000 × 15.5% ÷ 365 = ~$8.49 per day. Repay $10,000 and your daily interest drops to ~$4.25. The revolving structure means your interest bill tracks your actual cash needs — but it requires active management to avoid letting the balance creep permanently upward.
Which is better for managing seasonal cash flow — a loan or a line of credit?
A line of credit. Seasonal businesses (hospitality, tourism, retail, agriculture) have financing needs that ebb and flow across the year. Drawing $50,000 through slow months and repaying from peak-season revenue costs only the interest on what's drawn for the period it's needed. A term loan would have you paying interest on the full amount whether you need it or not, and the fixed repayment schedule doesn't flex with your revenue cycle.
Can a startup get a business line of credit in Australia?
Rarely. Most lenders require a minimum of 12 months ABN for a line of credit, and many want 2 years of trading history before approving revolving credit. If your business is under 12 months old, your best option is an unsecured term loan from a non-bank lender (minimum ABN age as low as 6 months) or a business credit card for smaller revolving needs. Once you have 12–24 months of clean bank statements showing consistent revenue, you'll have access to the full line of credit market.
Compare Business Loans and Lines of Credit on LoanGorilla
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loangorilla.com.au is an Australian Credit Representative (ACR) of Access Lending Group, Australian Credit Licence 531308. Rates and information are current as of May 2026 and subject to change. This guide is general information only and does not constitute financial advice.
Run the numbers yourself
Plug your own figures into the relevant Australian business loan calculators before you sign anything:
- Business Term Loan Calculator
- Working Capital Calculator
- Affordability & Stress Test Calculator
- Business Borrowing Power Calculator
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