Quick answer
A short-term loan gives a lump sum for a one-off need with a known end, repaid on a schedule or at the exit. A line of credit gives a limit you draw and repay as needed, paying time-based cost only on what's drawn, usually plus a line fee on the limit. Choose a loan for a single gap with a clear exit; choose a line of credit for recurring timing gaps that come and go.
Key points
- One-off need with a clear end: short-term loan.
- Recurring gaps between paying out and getting paid: line of credit.
- Lines of credit often charge a line fee on the whole limit, drawn or not.
- A line that's always fully drawn is really a term loan — and may be the wrong tool.
What problem is each one built for?
A short-term loan is built for an event. Something specific needs funding — a tax bill, a stock purchase, a contract start-up — and there’s a defined way the money comes back. You borrow once, repay once (or on a schedule), and the facility ends.
A line of credit is built for a pattern. The business regularly pays out before it gets paid — suppliers on 14 days, customers on 45 — and the gap opens and closes over and over. You draw when the gap opens, repay when it closes, and draw again next time.
business.gov.au lists lines of credit alongside business loans, overdrafts and invoice financing among the debt products banks and other lenders offer. The trick is picking the one whose shape matches your need.
How do they compare side by side?
| Short-term loan | Line of credit | |
|---|---|---|
| Money provided | Lump sum at the start | Limit you draw on as needed |
| You pay for | The full amount for the time held | Only what’s drawn, for the days drawn |
| Typical fees | Establishment, legal, discharge | Establishment, plus a line fee on the limit |
| Repayment | Scheduled or lump sum at exit | Flexible within the limit’s rules |
| Ends | At term | Reviewed periodically, often ongoing |
| Best for | One-off need with a clear exit | Recurring timing gaps |
How is each costed in dollars?
Short-term loan: fixed fees + time-based cost for the months you hold the money + exit costs. Simple and predictable. See total cost of a business loan.
Line of credit: fixed set-up fees + line fee on the limit (charged whether you use it or not) + time-based cost on the drawn balance for the days it’s drawn.
The line fee is the part people underestimate. If you set up a large limit “just in case” and rarely use it, the line fee can make the facility expensive for what it delivers. If you use it often and repay quickly, the flexibility is worth a lot.
Illustrative comparison only: a business that needs a similar amount for about ten weeks, twice a year, may find a line of credit cheaper than two separate short-term loans — each loan would carry its own establishment fee. A business with one large need for six months will usually find a loan cheaper than keeping a limit open all year.
If you can’t tell which pattern you have, tell us about your cash cycle — there’s no credit check to enquire.
How do you tell a one-off from a pattern?
Look back over twelve months of bank statements and ask:
- How many times did the account come close to zero or go into overdraft?
- Were those moments linked to the same cause each time (supplier runs, payroll ahead of receipts, seasonal stock)?
- How long did each gap last before the money came back?
If there’s one big dip with a clear cause, a loan fits. If there’s a recurring rhythm of dips, a line fits. A 13-week forecast makes the pattern obvious going forward; our 13-week cash flow forecast guide shows how.
What are the signs you’ve picked the wrong one?
Wrong: a line of credit that’s always fully drawn. If the balance never comes down, you’re paying line fees on what is effectively a term loan. Consider converting it into a short or long-term loan with a proper exit.
Wrong: repeated short-term loans for the same gap. If you take a new loan every season for the same purpose, each with its own establishment fees, a line of credit would probably serve you better.
Wrong: using either for a permanent need. If the business needs more working capital all the time, the answer is a longer facility or a change to pricing, terms or margins — not rolling short-term money. See when short-term is the wrong tool.
Can you have both?
Yes, and it’s often sensible: a line of credit for everyday timing gaps and a separate short-term loan for a specific event with its own exit. What to avoid is layering several short-term products to cover the same gap — that’s how debt stacking starts.
Illustrative: one need, two tools
Illustrative figures only. A wholesaler needs about $80,000 for ten weeks, twice a year.
| Two short-term loans | Line of credit, $80,000 limit | |
|---|---|---|
| Set-up | Two establishment fees, e.g. $1,500 each | One establishment fee, e.g. $1,500 |
| Ongoing | Nil between loans | Line fee on the limit all year, e.g. $150 a month |
| Time-based cost | 20 weeks in total | 20 weeks drawn in total |
| Paperwork | Twice a year | Once, then reviewed |
With these figures, the loans cost $3,000 in fees and the line costs $1,500 plus $1,800 in line fees — close to level. If the need happened four times a year, the line would win clearly; once a year, the loan would. That’s the pattern test in dollars.
Remember to check the line’s review terms too. Many lines of credit are reviewed annually, and the limit can be reduced or the facility closed at review. If your business relies on the line for recurring gaps, ask how reviews work and what the lender looks at.
Find the right shape for your gap
Start the 60-second enquiry and describe whether your need is a one-off or a recurring gap. A lending specialist will suggest a loan, a line of credit or a mix, with the dollar cost of each. Enquiring doesn’t involve a credit check, and your details aren’t sold on or spread around. Tell us on the form how often the gap happens and how long it lasts — that single detail usually settles the choice.
Frequently asked questions
What's the difference between a business loan and a line of credit?
A loan provides a fixed amount up front, repaid over a set term. A line of credit provides a limit you can draw on, repay and redraw, paying time-based cost only on what you've drawn, plus any fees on the limit.
Is a line of credit cheaper than a short-term loan?
It can be if you draw only occasionally, because you pay for money only while it's used. If you draw the full limit and leave it there, a line fee plus time-based cost may cost more than a term loan. Compare in total dollars for your pattern of use.
Can a line of credit be unsecured?
Yes. Unsecured lines of credit for trading businesses are typically sized on turnover and bank statements. Larger limits are often property-secured.
How do I know if I need a line of credit rather than a loan?
If you'd need the money again and again — every month or every season — to cover the same kind of timing gap, a line of credit usually fits better. If it's a single event, a loan is simpler.