Small Business Loan vs Business Line of Credit: What's the Difference?

One of the common questions we get from clients looking to choose finance for their business is: what's the difference between a small business loan and a business line of credit? When it comes to securing funding for your business, it’s important to choose the right finance solution to suit your needs. Businesses need finance for a whole range of different reasons, from buying equipment and machinery, to expand your operations or to help manage cashflow. And there are also lots of different types of commercial lending. Two common options are small business loans and business lines of credit. While both fall under the umbrella of commercial and business loans, they function in very different ways.

In this guide, we explain how a business loan works, how a line of credit works, and the pros and cons of each so you can make an informed decision about which option best suits your business.

What Is a Business Loan?

A small business loan is a lump sum of money borrowed from a bank or lender that is repaid over a fixed period, typically with interest. The loan is generally used for a specific purpose, such as purchasing equipment, funding expansion or covering startup costs. They can be secured (requiring collateral) or unsecured (no collateral required). You can usually gain access to larger amounts of finance through a business loan rather than lines of credit.

How Does a Business Loan Work?

• You apply for a set loan amount (e.g. $100,000)

• The lender approves the funds and deposits the full amount into your business account

• You repay the loan in fixed instalments over an agreed term (e.g. 3-5 years)

• Interest is charged on the full loan amount from day one

When to Use a Business Loan:

A small business loan is useful when you have a one-off cost that needs to be covered upfront and can be used to fund a range of business development opportunities including business equipment and assets, vehicles or property. Some examples of when a business loan could be used include:

• Buying equipment or machinery

• Expanding into a new location

• Hiring staff or investing in long-term projects

• An office or shop fit out

• Buying commercial vehicles

Benefits of a Business Loan:

• Predictable repayments make budgeting easier

• Often comes with competitive fixed or variable interest rates

• Suitable for large, one-off expenses

Drawbacks of a Business Loan:

• Less flexibility once the funds are used

• Interest applies to the total loan amount regardless of usage

• May require collateral or a personal guarantee

Find out more about the business lending process and how it works in our recent blog.

What Is a Business Line of Credit?

A business line of credit (or sometimes known as a business overdraft) is a revolving credit facility that gives you access to funds up to a pre-approved limit. You can draw from the line of credit as needed and only pay interest on the amount you use for as long as you use it. A line of credit is also usually (but not always) ‘unsecured’ meaning that you don’t need to put up collateral to get it.

How Does a Line of Credit Work?

• You are approved for a maximum credit limit (e.g. $50,000)

• You draw funds as needed and repay them flexibly

• Once repaid, the funds become available again (revolving credit)

• Interest is charged only on the amount used, not the total credit limit

When to Use a Business Line of Credit:

A line of credit is a great solution for shorter term fluctuations in your financing. Whether it be seasonal changes in your sales that mean certain periods have less cashflow or supplementing your working capital to provide liquidity to manage everyday expenses or seize business opportunities. Some examples of when a business line of credit could be used include:

• Managing cash flow gaps

• Paying suppliers or unexpected bills

• Covering seasonal slowdowns or emergencies

• Funding casual staff during a peak period

• Taking advantage of short term deals on stock

Benefits of a Business Line of Credit:

• Flexibility to draw funds as needed

• Interest only charged on what you use

• Helps manage working capital and short-term expenses

Drawbacks of a Business Line of Credit:

• Can be tempting to overuse

• Interest rates may be higher than standard loans

• May include fees for set-up, ongoing access, or non-usage

Business Loan vs Business Line of Credit: Which Is Right for You?

Choosing between a business loan and a line of credit depends on your business needs:

At CJG Finance, we specialise in matching businesses with the right financial solutions. Whether you're after a commercial and business loan for expansion or a business line of credit to smooth out cash flow, our expert brokers can help you compare lenders and secure competitive terms.

Need Help Choosing the Right Business Finance Option?

If you're unsure whether a business loan or line of credit is best for your situation, speak to the expert commercial and business loan broker at CJG Finance. We’ll help you assess your cash flow needs, borrowing capacity and growth goals to recommend the most suitable funding strategy.

Let us help you secure the right commercial and business loan solution – with less stress and more confidence.

To find out more, contact us or call Colin at CJG Finance on: 0402 413 917 or email him: cgreen@cjgfinance.com.au

The information contained in this post is for general guidance only and does not constitute personal advice. It's important to do your own research as regulations, fees and charges change over time.