A line of credit is a revolving limit you draw on and repay repeatedly, paying interest only on the amount you have drawn. A term loan is a single lump sum, paid out once and repaid on a fixed schedule, with interest running on the whole amount from day one. A line of credit suits a recurring, unpredictable cash-flow gap. A term loan suits a known, one-off purchase. The right choice follows the shape of the need, not the size of it.
Both are useful, and neither is better in the abstract. This guide sets out how each works, the real question that decides between them, and how the cost compares, with a calculator so you can weigh options side by side. 121 Brokers is a broker, not a lender: we compare both across a panel so you can see which fits your cash flow before you commit.
Line of credit vs term loan: the short answer
The cleanest way to tell them apart is to ask what happens after you repay. Repay a term loan and it is gone: the facility is closed and you would apply again for more. Repay a line of credit and the limit refills, ready to draw again without a fresh application. One is a single event; the other is a standing facility. That difference is the whole decision in miniature.
How a term loan works
A term loan gives you a fixed lump sum upfront, which you repay in regular instalments over a set term, commonly one to five years, with interest charged on the full balance. It is predictable: you know the amount, the repayment and the end date from the start. That certainty is its strength. It suits a specific, one-off need with a known price: buying a fit-out, funding a defined expansion, consolidating other debts into one payment.
The flip side is that interest runs on the whole amount from drawdown, whether or not you needed all of it straight away. If you borrow $100,000 but only really need $60,000 in the first few months, you are still paying interest on the full $100,000 the whole time. A term loan is efficient when you need the whole sum at once and inefficient when you do not.
How a line of credit works
A business line of credit is a revolving limit. The lender approves a maximum, and you draw what you need, when you need it, up to that limit. You pay interest only on the drawn balance, not the full limit, and every dollar you repay frees the limit back up to draw again. Over a year a seasonal business might draw the limit up before a busy period, sit near the top, then pay it back down and sit at zero for months, paying interest only for the weeks a balance was actually there.
That flexibility is the point. It suits a gap that repeats and cannot be predicted precisely: covering payroll through a quiet fortnight, buying stock ahead of a season, bridging the wait on slow-paying customers. What it is not built for is a single large purchase you will pay off steadily, which is a term loan's job. If you are weighing a line of credit against an overdraft rather than a term loan, our guide on the line of credit vs overdraft difference covers that.
The real question: one-off need or recurring need?
Strip away the product names and the choice comes down to one question: is this a single, known cost, or a gap that will come and go? A single known cost, priced and paid once, points to a term loan, because you want the whole sum now and a clear path to paying it off. A recurring, moving gap points to a line of credit, because you want to draw and repay as the need rises and falls, and pay only for the weeks you were actually short.
This matters because putting the wrong product against a need is a common and expensive mistake. The RBA noted in its October 2025 Small Business bulletin that around one in five SMEs found it hard to obtain finance in 2025, and part of that friction is businesses applying for a product that was never the right shape for their need. Matching the structure to the shape of the gap is half the battle.
Cost: paying for what you use vs paying for the lot
The two price differently, and the comparison is not just the headline rate. A term loan charges interest on the full amount for the whole term. A line of credit charges interest only on what you draw, but usually adds a line or facility fee for holding the limit available whether you use it or not. So a line of credit can be cheaper when your average drawn balance is well below the limit, and a term loan can be cheaper when you would draw and hold the full amount anyway.
The way to settle it is to compare total cost on your realistic usage, not the rate on the brochure. Run a like-for-like comparison of the options you are weighing, fees included:
Treat the output as an estimate. It reframes the decision from rate-shopping to cost-shopping on your actual pattern of use, which is where the honest answer sits.
When a term loan is the better call
Reach for a term loan when the need is a single, known amount you will pay down over time: a defined equipment or fit-out purchase, a specific expansion, or rolling several facilities into one predictable repayment through debt consolidation. The certainty of a fixed amount, a fixed repayment and a fixed end date is worth a lot when the cost is known and one-off. You can compare term options on the business loans hub.
When a line of credit is the better call
Reach for a line of credit when the need repeats and moves: seasonal stock buys, payroll through quiet patches, or the recurring wait on customer payments. Paying interest only on what you draw, and only for the days you draw it, is far more efficient than carrying a lump sum you did not need all of. If the cash is specifically tied up in unpaid invoices rather than a general gap, invoice finance scales with your ledger and is often sharper still.
Can you use both?
Often, yes, and many businesses do. A term loan funds the big one-off purchase, a machine, a fit-out, an expansion, while a line of credit sits alongside it to smooth the working-capital gaps that come and go. They are not competitors so much as tools for different jobs. Using each for what it does best is usually cheaper than stretching one to cover both.
How to compare with a broker
You tell us what the money is for and how your cash flow moves through the year. We match your file to the lenders on our panel whose appetite fits, and compare a term loan and a line of credit side by side on the things that matter: the amount, the rate, the fees, and the total cost on your realistic usage. You choose the structure that fits, and we handle the paperwork. Start on the line of credit page, read more on how a line of credit works, or compare your options with a broker.
General information only: not financial, legal or tax advice, and it does not take account of your objectives, financial situation or needs. 121 Brokers arranges business-purpose finance only and is a broker, not a lender. Any rates, fees, advance rates or timings mentioned are broad market guides, not quotes or offers. Approval, amounts, rates, fees and timing are determined by the lender or financier and are subject to its assessment criteria. Confirm any tax position with your accountant and at ato.gov.au.
