Working capital
Term loan vs line of credit
A term loan is cheaper when you need the money continuously. A line of credit is cheaper when you do not. The break-even depends entirely on how much of the year you are actually drawn, and that is arithmetic rather than opinion.
A term loan advances a lump sum you repay on a schedule until it reaches zero. A line of credit gives you a limit you can draw on and repay repeatedly, with interest charged only on the balance drawn, plus a fee for holding the limit available.
People usually choose between them on feel, and feel gets it wrong in both directions. A business that draws its limit and leaves it drawn is paying line fees for flexibility it is not using. A business on a term loan with money sitting idle in the account is paying interest on funds it does not need. The calculator below finds where the crossover sits for your figures.
The options
What each one actually is
-
Term loan
A lump sum with a fixed schedule and a known end date. Interest runs on the whole balance from day one.
- Suits
- A known one-off cost: a purchase, a project, a fit-out. Anything where you need all the money and you need it continuously.
- Watch out for
- Once repaid, the money is gone. Needing it again means applying again, and rigid schedules do not flex with a bad month.
-
Line of credit
A revolving limit. Interest is charged only on what you have drawn, and the room returns as you repay.
- Suits
- Recurring, uneven gaps: seasonal trade, stock cycles, waiting on customer payments.
- Watch out for
- The line or service fee is usually charged on the whole limit whether you draw it or not, so an unused facility is not free.
Run your numbers
Find your break-even point
Enter the amount, the rates you have been quoted and roughly how many months a year you would actually be drawn. Line and service fees are usually charged on the whole limit whether you use it or not, which is what the calculation turns on.
Be honest with this one. Most businesses guess high.
Term loan
- Monthly repayment
- Interest, first year
Line of credit
- Interest while drawn
- Line fee on the whole limit
- Total, first year
The break-even is around drawn per year. Below that the line of credit wins, because you stop paying interest the moment you repay. Above it the term loan wins, because you are paying a line fee on a limit you are using anyway.
On these figures there is no crossover within a year: one option is cheaper no matter how many months you draw. Adjust the rates or the line fee to see where that changes.
Simplified on purpose. The term loan is modelled as an amortising facility and the line of credit as interest on the drawn balance plus the line fee on the full limit. Real facilities carry other fees and conditions, so treat this as a way to compare shapes rather than as a quote.
Estimates only, for general information. Not a quote and not an offer of finance. Actual repayments, fees and approval are set by the lender.
At a glance
Side by side
| Term loan | Line of credit | |
|---|---|---|
| Money advanced | All at once | As you draw it |
| Interest charged on | The full balance | The drawn balance only |
| Ongoing fee on the limit | Generally no | Usually yes |
| Reusable once repaid | No | Yes |
| Repayments | Fixed schedule | Flexible, often interest only on what is drawn |
| Best when you need it | Continuously | Intermittently |
How to actually choose
The honest answer
The rule of thumb that survives contact with the numbers: the more of the year you are drawn, the more a term loan wins, because you avoid paying a fee on a limit you are using anyway. The more intermittent your need, the more a line of credit wins, because you stop paying interest the moment you repay.
Where it gets interesting is that most businesses overestimate how continuously they need the money. Work out honestly how many months you would actually be drawn before assuming a term loan is cheaper, and put that number into the calculator rather than a comfortable guess.
You do not have to pick one. Plenty of businesses run a term loan for the equipment and a line of credit for the trading gaps, because those are genuinely different jobs.
FAQs
Common questions
Is a line of credit more expensive than a term loan?
Per dollar drawn, often yes, and there is usually a fee for holding the limit available. But you only pay interest while you are actually drawn, so a business that dips in and out can pay less overall than one carrying a term loan continuously. The honest answer depends on your drawn months, which is what the calculator above works out.
Can I have both?
Often, yes, and it is a common structure: a term loan for a specific purchase and a revolving facility for working capital. Whether a lender will write both depends on serviceability across the total commitment, not on the products individually.
What is a line fee?
An ongoing charge for making the limit available, usually calculated on the full limit rather than on the balance you have drawn. It is the reason an unused line of credit still costs something, and it is the figure most often left out when people compare the two.
Which is easier to get?
It depends on the lender and on your trading history rather than on the product. Revolving facilities are often reviewed periodically and can be reduced or withdrawn, which is a difference worth understanding before relying on one as permanent working capital.
The right answer depends on your numbers.
A comparison page can show you the shape of the decision. Which option is actually cheaper for your business depends on what the lenders would offer you, and that is the part we do.
An enquiry is a conversation, not an application. We won't submit anything to a lender without your say-so.