Term loan vs line of credit: which one fits?
A term loan gives you a lump sum with fixed repayments. A line of credit gives you a limit you draw against, repay, and draw again. The right one depends on what the money is for.
General information only
The short answer: a term loan suits a single, defined purchase (you know the amount and you want it done), while a line of credit suits ongoing or unpredictable working capital, since you only pay interest on what you’ve drawn. Most businesses that ask this question already have a specific need in mind, and that need usually decides it for you.
What’s different between them?
A term loan is a lump sum you borrow and repay in fixed instalments over a set period. It’s the simplest form of business finance. A line of credit is a revolving facility: the lender approves a limit, you draw what you need and repay it, and the limit opens back up without a new application. A term loan can’t do that.
That flexibility is also where a line of credit gets complicated. They don’t all work the same way underneath, and what you can use one for depends on the lender. Read the usage terms before you sign either.
A term loan is fixed repayments on a set amount. A line of credit opens back up every time you repay it.
You know the number and the purpose
Buying a specific piece of equipment, funding a one-off stock order, or covering a defined project cost. A fixed repayment schedule is simpler to plan around when the amount and purpose are already settled.
The need is ongoing or hard to predict
Smoothing wages and stock timing, covering seasonal gaps, or having a buffer ready without knowing exactly when or how much you’ll need. You only pay for what you draw.
| What matters | Term loan | Line of credit |
|---|---|---|
| Amount range | $10,000 up to $5,000,000+ | $20,000 to $1,000,000 |
| Structure | Lump sum, fixed instalments | Revolving limit, draw and repay |
| Security (under $250k) | Usually a director’s guarantee, sometimes a GSA alongside it | Similar tiering, varies by lender and limit size |
| Speed | Often 24 to 48 hours once paperwork is in | Varies by lender, comparable once approved |
| Best suited to | A single, defined purchase or cost | Ongoing or unpredictable working capital |
Which one costs more, and what are you paying for?
A line of credit is priced variable almost without exception, while a term loan can be fixed. And the RBA’s business lending series for July 2026 puts new small business fixed-rate loans at 8.11% p.a. against new variable-rate loans at 7.07% p.a. That 104 basis point spread is the price of rate certainty, and it’s the decision underneath the choice between these two products.
| RBA series, July 2026 | Average rate |
|---|---|
| Small business, new fixed-rate loans | 8.11% p.a. |
| Small business, new variable-rate loans | 7.07% p.a. |
| Small business, new loans funded that month | 7.44% p.a. |
| Medium business, all loans outstanding | 6.21% p.a. |
Averages across all lenders reporting to the RBA, not quotes. The RBA lifted the cash rate to 4.60% on 29 September 2026, which is the level a variable facility reprices against.
Comparing those two headline rates isn’t quite comparing like with like. Here’s why. A term loan can lock 8.11% for the whole term, so you know the repayment years out. A line of credit can’t, because you ride the variable rate wherever it goes. More importantly, on a line of credit you pay interest only on the balance you’ve drawn. The same rate produces a very different dollar cost depending on how much of the limit you use. The rate is the wrong unit of comparison between these two. The dollar cost over the period you need the money is the right one.
A single lender will rarely frame it for you, because most can only offer the shape that fits their own policy. Run the two structures side by side on your real drawdown pattern and the answer is usually obvious. It isn’t always the cheaper headline rate.
Do you need property security for either one?
It depends on the number. Under $250,000, security on a term loan is usually a director’s guarantee: your signature, not your house. Some lenders will lend right up near that mark with no property backing at all, and you pay for that in the rate. Above $250,000, property security becomes more common, though some non-bank lenders will accept a caveat over property rather than a full second mortgage.
The same broad rule applies to lines of credit, though the threshold and structure vary more by lender. Ask before you assume either way.
We’re filming a segment with one of our lending partners walking through how they assess a term loan against a line of credit application for the same business. Once it’s up, it’ll sit here.
Choose a term loan if
- You’re funding a single, specific purchase
- You want a fixed repayment you can plan around
- You’d rather the facility close out on a known date
Choose a line of credit if
- Your cash needs move month to month
- You want a buffer ready without borrowing it all upfront
- You’ve checked the usage terms fit what you need
Can you use both?
Yes, and plenty of businesses do: a term loan for a defined purchase (new equipment, a fit-out) alongside a line of credit for day-to-day flexibility. The catch is that many line of credit lenders don’t want another working capital facility on your file without signing off on it first, and breaching that can mean repaying in full within 30 to 90 days. So structure the two to work together, and get each lender’s approval before you sign the second one.
Not sure which shape fits your business?
Tell us what the funding is for and we’ll tell you whether a term loan, a line of credit, or something else entirely is the right call.
Frequently asked questions
Give us the basics below and we’ll call you within the hour, or at the time you choose, then come back with the two or three offers worth your time.