01
A seasonal trough, every year
A limit. The need recurs on a calendar, the money is not wanted for half the year, and a term loan would charge for the months the business is at its strongest.
Guide
One question settles almost all of this.
Whether the money will be wanted again after it is repaid. Everything else about the comparison follows from the answer, including the price.
MS
Matt Stiles Editor
Published 8 September 2026 Last reviewed 8 September 2026 Read time 12 min
The short version
Five lines that decide it.
- A need that returns wants a limit. A facility that repays to zero funds the last cycle rather than the next, and a business in that position ends up with two.
- A need with an end wants a loan. Lower rate, a schedule that clears it, and no temptation to leave a balance sitting.
- The rate comparison is misleading. A term rate is lower and applies to the whole amount throughout. A limit rate is higher and applies only to what is drawn.
- A schedule is a feature, not a cost. The thing that forces a balance down is worth having wherever the borrowing should not be permanent.
- Indicative only. This is general information rather than advice, and every figure is illustrative.
The two shapes
What actually differs.
Ordered roughly by how much each row matters to the decision. The first two carry most of it.
| Feature | Line of credit | Term loan |
|---|---|---|
| Available again after repayment | Yes | No |
| Interest charged on | The drawn balance | The whole amount |
| Repayment | At the business’s discretion | On a schedule |
| Rate | Higher | Lower |
| Cost when the money is not needed | The line fee only | Full interest |
| Anything forcing the balance down | Only a clean-down condition | The schedule |
| Can be withdrawn | Yes, at review | No, once drawn |
| Suits | A recurring, variable need | A one-off, sized need |
The rate row is the one businesses lead with and it is the fourth most important. A higher rate on money borrowed for three months a year beats a lower rate on money borrowed for twelve.
Worked example
The same $120,000, three ways.
A business needs up to $120,000 of funding capacity. A term loan is offered at an indicative 12% over two years; a revolving limit at an indicative 15% with a 0.6% line fee.
If the money is genuinely needed continuously for two years, the term loan wins clearly. It costs roughly $15,300 in interest across the term against roughly $36,000 on a limit drawn fully throughout, because the term loan is amortising and the limit is not.
If the money is needed for four months a year, the limit wins just as clearly. Interest on an average drawn balance of $40,000 is roughly $6,000 a year, plus $720 in line fee, against a term loan charging on a balance that started at $120,000 whether the money was needed or not. And at the end of two years the limit is still available and the loan is gone.
Illustrative figures
- Term loan, 24 months at 12%
- ~$15,300 interest
- Limit drawn fully for 24 months
- ~$36,000 interest
- Limit at $40,000 average
- ~$6,000 a year
- Plus line fee
- $720 a year
Illustrative on stated assumptions and rounded. Not a quote or offer of credit.
Reading the example
Both instruments win decisively, on different facts.
The comparison is not close in either direction once the usage pattern is known, which is why the usage pattern is the whole question. A term loan drawn and left outstanding is cheap, and a limit drawn and left outstanding is expensive. A limit used intermittently is cheap, and a term loan used intermittently is impossible, because a term loan cannot be used intermittently at all.
That asymmetry matters. A business that chooses a limit and finds it needs the money continuously has made an expensive mistake it can correct by terming out the balance. A business that chooses a term loan and finds the need recurs has made a mistake it corrects by taking a second facility, which is worse.
Where the pattern is genuinely uncertain, the limit is the safer error. It costs more in the continuous case and it does not trap the business in the recurring one.
Four clear cases
Where the answer is not in doubt.
02
A fitout or a one-off purchase
A term loan. The spend has an amount and an end, the asset or improvement will not convert back to cash, and a schedule forces the borrowing down.
03
Waiting on customer payments
A limit, or a receivables facility. The gap reopens every cycle, and a term loan would fund the last one while the next one forms.
04
Consolidating a hardened overdraft
A term loan. The permanent portion is not revolving, and terming it out lowers the rate while restoring headroom on the limit for genuine fluctuation.
The test
Will the same shortfall exist next quarter, for the same reason.
That single question separates the two instruments better than any comparison of rates. Where the answer is yes, the need is a condition and a facility that repays to zero will fund the last occurrence rather than the next, which is how a business ends up servicing two loans for one problem. Where the answer is no, the need is an event, it has a size and an end, and a term loan is the cheaper and cleaner way to fund it. The question takes a minute and it is asked far less often than the rate is compared.
The trade
What each shape gives up.
A limit gives up
- The lower rate a term facility carries
- The certainty that the funding cannot be withdrawn
- The discipline of a schedule that forces the balance down
- Simplicity, since a facility with no schedule requires active management
- A defined end, after which the obligation is finished
A term loan gives up
- Availability after repayment, which is the whole point of a limit
- The ability to pay for only the months the money is needed
- Flexibility to repay early and redraw without a new application
- Responsiveness to a need that changes size between cycles
- The option of holding capacity cheaply without using it
The hybrid
Most businesses should have both.
The framing as a choice is frequently wrong. A business with a permanent core requirement and a fluctuating layer on top is best served by a term facility covering the core and a limit covering the fluctuation, which is exactly what a bank means when it suggests terming out part of an overdraft.
That structure costs less than either instrument alone would for the same total. The permanent portion attracts the lower term rate and is repaid on a schedule that actually clears it, and the limit is left free to do the thing it is good at.
It also produces a better review. A lender looking at a term facility being repaid on schedule and a limit that genuinely moves is looking at a business that understands its own funding, which is worth something at every conversation afterwards.
Method
How this guide was written, and its limits.
The figures are illustrative and calculated on stated assumptions rather than drawn from any lender’s pricing. Rates, fees and terms vary considerably by lender, by security and by applicant, and the only figures that matter are those a lender puts in writing.
The comparison is structural rather than promotional. Neither instrument is better in the abstract, and a page that concluded otherwise would be recommending a product without knowing the need, which is the thing this site does not do.
Nothing here is financial advice. This site is not a lender, a broker or a registered financial adviser, and which shape suits a particular business depends on facts a website cannot see.
Worked totals
The same $120,000, at four usage levels.
Illustrative at an indicative 12% on the term facility over 24 months and 15% plus a 0.6% line fee on the limit. The crossover is where the answer changes.
| Usage | Term loan, two years | Limit, two years | Cheaper |
|---|---|---|---|
| Drawn continuously | ~$15,300 | ~$37,440 | Term loan |
| Drawn eight months a year | ~$15,300 | ~$25,440 | Term loan |
| Drawn five months a year | ~$15,300 | ~$16,440 | Close |
| Drawn three months a year | ~$15,300 | ~$10,440 | Limit |
| Held, rarely drawn | ~$15,300 | ~$3,240 | Limit |
Illustrative on stated assumptions and rounded. Not a quote or offer of credit.
Reading the table
The crossover sits around five months of use.
On these assumptions the two instruments cost roughly the same where the money is needed for about five months of each year. Below that the limit wins and above it the term facility does, and the size of the win grows quickly in both directions.
The crossover moves with the rate gap and with the line fee, so it is worth calculating on actual quotes rather than assuming the figure above. What does not move is the shape: there is always a crossover, and the business’s own expected usage is what places it.
The row that should end the discussion is the last. A facility held and rarely drawn costs almost nothing beyond the line fee, and a term loan for the same purpose charges the full interest for money sitting in an account. Nobody would choose that deliberately, and it is chosen by default whenever a term loan is taken for a need that turns out to be intermittent.
The wrong reasons
Four arguments that decide this badly.
Each of these is heard regularly and none of them addresses the question the choice actually turns on.
01
The rate is lower on the term loan
True and frequently irrelevant. A lower rate applied to the whole amount for the whole term beats a higher rate on a fraction of it only where the money is genuinely needed throughout.
02
A limit is more flexible
In use, yes. In availability, no, because most small business limits are uncommitted and can be reduced at review, whereas a drawn term loan cannot be withdrawn.
03
The bank offered a loan
What a lender writes most often is not necessarily what fits. Asking for a quote on the other structure is ordinary and frequently produces one.
04
A schedule feels like pressure
It is the feature that prevents a balance becoming permanent. Where the borrowing should not be permanent, the pressure is doing something useful.
The sequence that works
Describe the need before comparing the products.
A business that writes down what the money is for, how much of it is needed at once, how long it will be needed and whether the same need recurs has already answered the question. Everything on this page is a way of restating those four facts.
The failure mode is the reverse sequence, where two offers are compared on rate and the need is fitted to whichever won. That produces a term loan for a seasonal trough and a revolving limit for a fitout, both of which are expensive mistakes and both of which are common.
It takes ten minutes and no lender is involved in it. It is also the part of the process that determines the outcome more than any negotiation afterwards.
A third option
Where a term facility with redraw sits.
Some term facilities carry a redraw feature, allowing amounts repaid ahead of schedule to be taken back. That sits between the two structures: a schedule still clears the balance, and money repaid early is not gone.
It is worth asking about where the need is genuinely mixed, because it captures part of the flexibility of a limit at closer to term pricing. What it does not offer is capacity beyond the original amount, so it suits a business that expects to repay ahead and occasionally step back rather than one whose requirement grows.
Whether a redraw exists, how quickly it can be accessed and whether it costs anything are three questions with short answers, and the feature is present more often than it is mentioned.
The consequences of choosing wrong
Two mistakes, and how each one plays out.
Both are recoverable and one is considerably more expensive to recover from than the other.
A term loan for a recurring need
The facility repays to zero over its term while the same gap continues forming, so a second facility is taken alongside the first before the original is finished.
What happens:Two schedules running against one business for one problem, and a total commitment considerably larger than the gap ever was.
A limit for a permanent need
The balance never comes down because nothing forces it to, and the business carries long-term borrowing at revolving pricing.
What happens:A higher cost than necessary and a weaker review, both of which are fixed by terming out the permanent portion in a single conversation.
The second mistake is corrected by a conversation with the existing lender. The first is corrected only by repaying facilities that should not have been taken, which is why choosing the limit where the pattern is genuinely uncertain is the safer error.
The term side
What a scheduled facility costs.
This runs the amortising arithmetic for the term loan side of the comparison. The revolving side is on the facility pages, where the calculator runs on a drawn balance instead. Indicative only, and not a quote or offer of credit.
Indicative repayment
Weekly
$1,304/week
$5,649 /month $15,572 total interest
$120,000
$5,000 $500,000
2 years
6 months 5 years
12.00% p.a.
8% (secured) 30% (unsecured)
Indicative only. Not a quote or offer of credit. Actual rates, fees, and repayments depend on the business profile and the lender's decision.
Sending to Prospa
Your $120,000 scenario
2 years at 12.00% . Prospa will ask a few quick questions, then provide a firm quote and funding if eligible.
Redirecting…
References
Sources
- Reserve Bank of New Zealand, statistics
Context for New Zealand business lending rates and why indicative bands move.
- Commerce Commission
The regulator whose guidance covers lender conduct and disclosure.
- Financial Service Providers Register
Where a New Zealand lender’s registration can be confirmed before an application is made.
- Personal Property Securities Register
Backs the description of security taken over either kind of facility.
- Financial Markets Authority, financial advice
Backs the distinction between general information of this kind and regulated financial advice.
FAQ
Questions, answered
Which is cheaper, a line of credit or a term loan?
It depends entirely on usage. A term rate is lower and applies to the whole amount throughout; a limit rate is higher and applies only to what is drawn. Money needed for a few months a year is cheaper on a limit and money needed continuously is cheaper on a loan.
What is the test for choosing between them?
Whether the same shortfall will exist next quarter for the same reason. Yes means a limit; no means a loan. That question decides the instrument better than any comparison of rates.
Why is a term loan a poor fit for a recurring need?
Because it repays to zero and then has to be reapplied for. It funds the last occurrence of the gap while the next one is already forming, which is how a business ends up servicing two facilities for one problem.
Why is a limit a poor fit for a permanent need?
Because nothing forces the balance down and the rate is priced for temporary use. Permanent borrowing on a revolving facility costs more than a term loan for the same money and reviews worse.
Can a business have both?
Frequently the best answer. A term facility covering the permanent core and a limit covering the fluctuation costs less than either alone for the same total and produces a better review.
What is terming out a balance?
Converting the portion of a revolving facility that never comes down into a scheduled facility at a lower rate, leaving the limit free for genuine fluctuation. Lenders generally welcome the conversation.
Which is the safer mistake?
A limit, where the pattern is genuinely uncertain. It costs more if the need turns out to be continuous, and it does not trap the business if the need turns out to recur.
Does a schedule have value?
Yes, and it is frequently treated as a cost. The thing that forces a balance down is worth having wherever the borrowing should not become permanent, which is most of the time.
Can a term loan be redrawn?
Not ordinarily. Some facilities offer a redraw feature, and where they do the arrangement is closer to a revolving facility than to a conventional loan. Whether one exists is a question for the agreement.
Is a limit always more flexible?
In use, yes. In availability, no, because most small business limits are uncommitted and can be reduced at review, whereas a drawn term loan cannot be withdrawn. That is the trade the flexibility comes with.
What if the amount needed keeps changing?
That points at a limit. A facility sized to the largest requirement and drawn to whatever is actually needed handles a variable amount at a cost proportional to usage, which no term facility can do.
Is this guide financial advice?
No. It compares two structures in general terms. This site is not a lender, a broker or a registered financial adviser, and which suits a particular business depends on facts a website cannot see.
Related
Keep reading
Business line of credit
The revolving side of the comparison.
Read onHow a line of credit works
The mechanism underneath it.
Read onAgainst an overdraft
The other comparison businesses arrive with.
Read onHolding an emergency buffer
The case where only a limit works.
Read onAll eight facilities
Every revolving arrangement compared in the same shape.
Read on