What’s the difference? Business Loan versus Line of Credit

Whether you’re looking for funds to grow your business, boost your cashflow or top up your working capital, there are different options available. The two most common are a business line of credit and a business loan. It’s important to understand them so you can pick the solution that is right for your business.

How a business line of credit works?
A business line of credit is an ongoing source of funding that can be drawn back down as it is repaid – rather than a lump sum that is paid off. Once you’ve been approved to access a line of credit, you can draw down on part or all of the funds during the term of the facility, which is usually 24 months. You only pay interest on the money you have used, for as long as you use it. So, if you have a $20,000 line of credit, you could draw down $10,000 one week and repay the money the following week, only accruing interest on the money you’ve accessed until it is repaid. It’s a bit like a credit card but may come with a lower interest rate and can be a useful safety net if your cash flow is unpredictable. A line of credit is usually – but not always – a form of unsecured debt, so borrowers are usually not required to put up collateral.

What a business line of credit is useful for
A business line of credit may help manage fluctuations in cash flow. For example, it could help when cash flow dips due to an off-season lull in business but you need to keep on top of payroll, or if you anticipate a delay on payment from clients. It can also work as short-term top-up to working capital so you can take advantage of a particular opportunity, like a good deal on a bulk buy of stock, or for covering the costs of paying extra staff over a busy period, funding rent on a pop-up space, trying out a lease on a co-working space, or funding repairs to equipment.

How a business loan works?
A business loan is a lump sum amount that you receive on the day the loan term begins. It comes with a schedule of regular repayments, and there may be restrictions on whether the full amount can be paid back early. Typically, you will need to pay interest on the outstanding debt throughout the term of the loan. Business loans will usually be higher amounts than lines of credit, and some do not require collateral. Larger business loans may require collateral.

What business loans are useful for?
Because business loans are usually available for larger amounts than a business line of credit, they can be useful to fund large purchases such as equipment. They can also be a good solution to spread out a sizeable one-off expense – like an office renovation or shop fit-out – that needs to be paid upfront. A business loan may be used for start-up costs, capital investment, business acquisition, marketing campaigns, purchasing new or secondhand equipment, starting a franchise, purchasing commercial vehicles, technology upgrades and refinancing other debt. While a business loan can also be used to fund inventory costs or to take advantage of a one-time deal on discounted stock, for instance, a line of credit could also be suitable for those needs.

If your business needs funds for opportunity, growth or cash flow support, your experienced Green Team business finance broker will be in the best position to help you compare a range of solutions for your business.


THE FINEPRINT: The information provided on this site is on the understanding that it is for illustrative and discussion purposes only. While all care and attention are taken in its preparation any party seeking to rely on its content or otherwise should make their own enquiries and research to ensure its relevance to your specific personal and business requirements and circumstances.

Green Finance Group Pty Ltd ACN 145 035 221 is authorised under LMG Broker Services Pty Ltd ACN 632 405 504 Australian Credit Licence 517192.

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Meet the Author

"The ins and outs of commercial finance and home loan lending have been part of my daily life for almost three decades now, just on the 'other side of the fence', having worked at some of the country's largest banks, including Bank of Queensland, Bankwest, National Australia Bank, Suncorp and Westpac."

Aaron Minarelli

Finance Consultant - Daniel Green Team
  • Commercial Finance, Equipment Finance, Home Finance

Fortitude Valley, Brisbane

An experienced banker and financial analyst on your side.

My experience as a banker and analyst and exposure to a range of lenders affords me an excellent understanding of the lending marketplace so whether you are looking to purchase or expand an existing business, need to improve your cash flow or are considering a new home or renovation, I can help you.