Three Different Business Loans: Which Is Right for You?

Most businesses don’t need “a loan”. They need the right type of finance for what they’re trying to do. Buying a business, covering a slow month and waiting on customers to pay are three very different problems, and using the wrong product for any of them can cost you more and tie up your cash flow. These are the three business loans we arrange most often, and when each one makes sense.

1. Business term loan

A term loan gives you a lump sum upfront that you repay in regular instalments over a fixed term, usually from one to five years for unsecured loans and longer when property is used as security.

• Best for: one-off investments such as buying a business, a fit-out, expansion or consolidating debt
• Security: secured against property or business assets, or unsecured for smaller amounts
• Pros: predictable repayments and generally the lowest rates when secured
• Watch for: early repayment costs, and borrowing more than you need because the money arrives at once

2. Business line of credit

A line of credit gives you an approved limit you can draw on and repay as needed, a bit like a large, flexible overdraft. Interest is generally charged only on the amount you’ve drawn.

• Best for: uneven cash flow, seasonal businesses and short-term gaps such as paying suppliers before customers pay you
• Security: often secured against property for larger limits, with unsecured options available
• Pros: flexibility, and you only pay for what you use
• Watch for: line fees charged on the full limit, and the temptation to use it for long-term spending

We cover this in more detail in the pros and cons of a line of credit.

3. Invoice finance

Invoice finance lets you borrow against your unpaid customer invoices. The lender advances a large share of an invoice’s value quickly, then the balance, less fees, is paid when your customer pays.

• Best for: B2B businesses with strong sales but long payment terms, such as manufacturing, wholesale, freight and labour hire
• Security: the invoices themselves, so property often isn’t needed
• Pros: the facility grows as your sales grow
• Watch for: how fees are calculated, and whether your customers will be told about the arrangement

How to choose

• Funding a one-off purchase or project? Look at a term loan.
• Smoothing day-to-day cash flow? A line of credit usually fits.
• Waiting on customer invoices? Consider invoice finance.

Buying a vehicle or equipment? That’s usually best handled by dedicated vehicle and equipment finance, which uses the asset as security. See chattel mortgage vs finance lease.

How a broker helps

Banks, non-banks and specialist lenders each favour different products, and the same business can get very different terms depending on where it applies. We compare options across our panel of 100+ lenders and often combine facilities, such as a term loan with a line of credit, so each part of your borrowing does the right job. Read more about our business loans and working capital finance.

Frequently asked questions

Which business loan is cheapest?

It depends on the security and the purpose. A secured term loan is usually the cheapest per dollar borrowed, but a line of credit can cost less overall if you only draw on it occasionally, because you generally pay interest only on what you use.

Can I have more than one type of business loan?

Yes. Many businesses use a term loan for a one-off investment alongside a line of credit or invoice finance for day-to-day cash flow. The key is matching each facility to its purpose.

What is invoice finance?

Invoice finance lets you borrow against unpaid customer invoices, typically advancing a large share of their value within a day or two, so you aren’t waiting 30 to 90 days to be paid.

This article is general information only and doesn’t take into account your objectives, financial situation or needs. Speak to us or your accountant before making a decision.