Revolving credit facility vs term loan: which does your business need?

Term loans and revolving credit facilities are the two main shapes of business borrowing. Choosing the wrong one means either paying interest on money you do not need or running short of cash midway through a project. This guide sets out how each works and when each suits. We are a broker: we compare both from lenders on our panel.

01How each works

A term loan is a fixed amount paid out at the start and repaid in regular instalments over an agreed term, often one to five years for unsecured loans and longer when secured. You pay interest on the whole amount from day one, falling as you repay.

A revolving credit facility is a limit you can draw from when you need it, repay and draw again during the facility's life. Interest is charged only on the amount drawn, and some lenders also charge a fee for the facility or on the undrawn limit.

02Side by side

03Worked example: a £150,000 need

An illustration only, not a quote, using rates within the ranges lenders on our panel publish (see the rate index), before fees.

• Term loan: £150,000 over 36 months at 10% a year costs £4,840.08 a month, £24,243 of interest in total.
• RCF: a £150,000 limit at 14% a year, used on average at £60,000 over the year, costs about £8,400 of interest for that year, plus any facility fee.

If the need is constant, the term loan is cheaper because its rate is lower. If you only need the full amount for a few months a year, the RCF can cost less despite the higher rate, because you are not paying interest on idle money.

04When a term loan suits

• A one-off investment with a clear cost: equipment, a fit-out, an acquisition.
• You want fixed payments for budgeting.
• You are replacing short-term debt with a longer repayment profile.

05When a revolving credit facility suits

• Seasonal trade, lumpy contracts or long customer payment terms.
• Paying VAT, tax or supplier bills that fall before customers pay.
• You want a standby facility you may not always use.
• A property-backed revolving facility can offer larger limits if you have property to secure it.

06Risks to weigh

• An RCF used as permanent borrowing can cost more than a term loan and may not be renewed.
• A term loan taken for cash flow leaves you paying interest on money sitting in the bank.
• Both usually need a personal guarantee when unsecured.

07Using both

A common structure is a term loan for the investment plus an RCF for working capital, so each part of the need is funded the way it behaves. Our revolving credit facility vs overdraft guide compares the RCF with a bank overdraft.

08How we can help