Finance & Lending
Term loan, overdraft or line of credit? Match the facility to the problem
A plain comparison of business funding options in Australia — term loans, overdrafts, lines of credit, invoice finance and equipment finance — and which problem each one actually solves.
Most business borrowing goes wrong in the same way: the right amount of money, in the wrong shape. A five-year term loan used to cover a seasonal dip. An overdraft funding a piece of machinery. Each one works for a while and then creates a problem that looks like a cash flow problem but is actually a structuring problem.
The question to answer first is not "how much do I need?" It is "how long will the money be out, and what repays it?"
Term loan
A fixed amount, repaid over a fixed period, usually with regular principal and interest.
Fits: a defined, one-off need with a payback period you can name. Buying a business, a fit-out, a large equipment purchase, or consolidating expensive short-term debt.
Does not fit: working capital that fluctuates. If the need comes and goes, a term loan leaves you paying interest on money sitting in your account in the quiet months, and short in the busy ones.
Watch: the term should match the useful life of what you bought. A three-year loan on a ten-year asset strangles cash flow. A ten-year loan on a three-year asset means you are still paying for something you have replaced.
Overdraft
A limit attached to your trading account. You draw down by going into negative balance, and you only pay interest on what you actually use.
Fits: the gap between paying your costs and being paid. Wages on the 15th, customer payment on the 30th. This is the classic and correct use.
Does not fit: anything permanent. An overdraft that never returns to zero is not a working capital facility, it is a term loan with a higher rate and an annual review that can be withdrawn.
Watch: overdrafts are usually repayable on demand and reviewed annually. That review is a genuine risk — a facility can be reduced or pulled at the point you most need it, typically when your financials have deteriorated. Also watch line fees, which are charged on the limit whether or not you use it.
The test of a healthy overdraft: does it hit zero at some point in every cycle? If not, part of it is structural debt in the wrong wrapper.
Line of credit
A revolving limit, drawn and repaid at will, typically secured against property.
Fits: lumpy, recurring capital needs where timing is unpredictable. Stock purchasing ahead of a season, staged project costs, opportunistic buying.
Does not fit: businesses that will treat available credit as available cash. A line of credit requires discipline, because nothing forces the balance down.
Watch: secured lines are usually property-backed, which means you are putting the house behind trading risk. Cheaper, and considerably more serious. Understand what happens if the business fails before you sign.
Invoice finance (debtor finance)
You advance against your unpaid invoices — typically 70–85% immediately, the balance when your customer pays, less a fee.
Fits: B2B businesses with long payment terms and creditworthy customers. Labour hire, wholesale, transport, construction subcontracting. It solves the specific problem of growth consuming cash faster than it generates it.
Does not fit: businesses selling to consumers, or with a small number of customers, or with disputed and progress-claimed invoices.
Watch: the cost is higher than a bank facility and is usually quoted as a discount fee plus a service fee, which makes comparison hard. Ask for the total cost as an annualised percentage of funds advanced. Also check whether it is disclosed — meaning your customers know — because that changes the relationship.
Equipment and asset finance
The asset secures the loan. Chattel mortgage, finance lease or hire purchase.
Fits: vehicles, machinery, plant, technology. Almost always the cheapest way to fund a specific asset, because the lender's security is the thing itself.
Watch: the GST and tax treatment differs between a chattel mortgage and a lease, and the difference is real. Under a chattel mortgage you generally claim the GST on the purchase price up front and claim depreciation and the interest; under a lease you generally claim the lease payments and the GST on each payment. Which is better depends on your GST position, your cash flow and whether you want to own the asset at the end. This is worth ten minutes with your accountant before signing, not after.
Unsecured online lenders
Fast, light on documentation, decisions in a day, and priced accordingly.
Fits: genuinely urgent, genuinely short-term, genuinely small, and where the return on the money clearly exceeds the cost. A machine breakdown that stops production is a fair use.
Does not fit: almost anything else. Effective rates are often well into the double digits, repayments are frequently daily or weekly against your trading account, and taking a second one to service the first is a recognisable pattern that ends badly.
Watch: the quoted "factor rate" is not an interest rate. A 1.20 factor over six months is not 20% per annum — annualised, it is far higher. Always convert to an annualised cost before comparing.
Choosing, in one page
| Need | Shape | Facility |
|---|---|---|
| Buy a specific asset | Fixed, medium term | Equipment finance or chattel mortgage |
| Buy a business or fit out premises | Fixed, long term | Term loan |
| Bridge payroll to customer payment | Fluctuating, short | Overdraft |
| Fund seasonal stock | Lumpy, recurring | Line of credit |
| Growth outrunning debtor terms | Scales with sales | Invoice finance |
| Emergency, days not weeks | Very short | Unsecured — with eyes open |
What lenders will ask for
For most business facilities above a modest size: two years of financials and tax returns, recent BAS, twelve months of business bank statements, an aged receivables and payables listing, and details of existing commitments. For anything property-secured, a valuation.
The single most common reason a business finance application stalls is not the numbers. It is that the financials are eighteen months old. A lender assessing a business on stale accounts will assume the worst, because that is the prudent assumption.
Which is the practical argument for keeping the books current even in years when nothing is happening — the year you need funding at short notice is never the year you planned for it.
General information only. This is not credit assistance or a recommendation and does not consider your objectives, financial situation or needs. All lending is subject to credit assessment and lender criteria; fees, charges and terms and conditions apply. To talk through the right structure for your business, book a free consult.