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Business Loan vs Line of Credit - Which Is Cheaper?

Compare a business loan against a line of credit with our calculator. See which is cheaper for how you would actually use the funds, plus the breakeven.
Updated 2 August 2026
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Summary
  • ​A business loan and a line of credit solve different problems, and choosing the wrong one is an expensive mistake.
  • A business loan gives you a fixed sum you pay down on a set schedule, with interest on the full amount from day one.
  • A line of credit lets you draw and repay as you need, with interest only on what you draw, but a service fee that runs on your whole limit.
  • The cheaper option depends almost entirely on one thing - how much of the facility you would actually use, and for how long. The calculator below works that out for your numbers and shows the exact point where one becomes cheaper than the other.
  • Know this first: A line of credit usually carries a higher interest rate than a business loan, and it almost always adds a service fee on your full limit on top. So it only wins on cost when you would keep a small share of it drawn. Our calculator lets you set your own rates and usage to see the estimated costs.​

Business Loan vs Line of Credit Calculator

A business loan charges interest on the full amount from day one. A line of credit only charges interest on what you draw, but adds a fee on your whole limit. This shows which is cheaper for how you would actually use the money.

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$5k$500k
The time the funding is in place. The line of credit is compared over the same period.
% p.a.
6%40%
% p.a.
A line of credit usually carries a higher rate than a secured business loan.
Rarely drawnAlways maxed
For the line of credit only. The share of the facility you would carry on average.
% of limit
Charged on the full limit, drawn or not.
%
One-off set-up cost on each product.
Cheaper option
Line of credit

Your breakeven point

Below the line a line of credit is cheaper. Above it, a business loan wins.

0% drawn100% drawn

Business loan

$0
total cost of borrowing over the period

Line of credit

$0
total cost of borrowing over the period

Illustrative only and not financial advice. The business loan is modelled as a fixed amortising loan with interest on the full balance. The line of credit is modelled as interest on the drawn share you choose, plus a service fee on the full limit, with the principal repaid at the end of the period. Each product uses its own rate, since a line of credit usually costs more per year than a secured business loan. Always confirm actual rates and fees with the lender.

Line of credit or business loan: which is cheaper for you?

The answer depends entirely on how much of the facility you would keep drawn, and for how long. If you would only dip into it occasionally, a line of credit is usually cheaper because you avoid interest on funds you are not using. If you would keep most of it drawn most of the time, a business loan often costs less, because you are not paying a service fee on a limit you are barely using.

Rather than guessing, use our business loan vs line of credit calculator to find the exact utilisation point at which one becomes cheaper than the other. If you simply want repayments on a fixed sum, our business loan calculator covers that.
Funding either option: our view on Prospa
Whichever way the calculator points you, it helps that some lenders do both, so you can act on the answer without shopping around again. Prospa (a MoneyHub partner) is the one we would look at first, and it funds both:
  • Business loans from $5,000 to $500,000 - for a planned, one-off spend you will pay down
  • A line of credit up to $500,000 - for cash-flow gaps you draw on and clear as you go
  • No property security required up to $150,000
  • A decision in about an hour, with funding often the same day
  • Unlimited extra repayments, no penalty, so you can clear the balance and cut interest whenever cash allows

​Important Update for any Business Looking to Borrow in 2026
  • We keep hearing from businesses and seeing it in data-driven media reports that banks are pulling back on unsecured business lending, and overdrafts are being trimmed.
  • Prospa, a specialist lender and trusted MoneyHub partner, has stepped into the gap, with rates from 14.99% p.a. and a decision in about an hour.
  • Prospa confirmed with MoneyHub that recent lending to established businesses (trading 3+ years, with solid turnover) typically sits between about 15% and 20%.
  • See the rate you'd actually pay with Prospa on their website.
  • Know This: Your rate depends on your trading history, turnover and industry, and these are annual simple rates, so your real cost is a little higher.

True to our consumer and small business-first approach, we obtained Prospa NZ's audited accounts from the Companies Office for the year ended June 2025. Three things stood out, and all of them matter when you are trusting a lender with your cash flow:
  • They are financially healthy: Prospa NZ is profitable and has positive equity, indicating a stable lender more likely to work with you if your circumstances change.
  • They have money to lend: Prospa secured $190 million in new SME funding in late 2025, so when they say they can fund quickly, they have the capacity to back it up.
  • They are reinvesting, not extracting: Prospa NZ paid no dividends, retaining profits to grow its lending.
  • Prospa is backed by a parent group that has funded over $4 billion in small-business lending across Australia and New Zealand since 2012, funding more than 50,000 businesses.

Our View: On either product, Prospa funds faster and asks for less security than the banks. Once the calculator above shows you which structure fits, Prospa lets you apply for that one.

Get a fast quote from Prospa - Checking your eligibility takes a few minutes and won't affect your credit score.

Business Loan vs Line of Credit - What's the Better Choice?

We outline what's important for both options:
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Option 1 - When a business loan is the better choice
A business loan is the cheaper, simpler option when you need a set amount for a set purpose. It suits:
  • A one-off purchase with a known price - equipment, a vehicle, a fit-out, or a planned expansion
  • Money you will draw in full and pay down over time - no paying for flexibility you will not use
  • Borrowers who want certainty - the repayment is fixed, so you can budget around it to the dollar
  • Anyone who can offer security - secured business loans carry the lowest rates on the market

Our View: If you will draw most of the money and keep it drawn, a business loan almost always wins on cost.

Option 2 - When a line of credit is the better choice
A line of credit is popular when the need is short, lumpy and hard to predict. It suits:
  • Covering a timing gap - paying wages or suppliers while you wait on a big invoice
  • Smoothing a seasonal dip - drawing in the quiet months, repaying in the busy ones
  • A buffer you may not use - it sits ready, and costs little if you barely touch it
  • Anything you can clear quickly - interest stops the day you repay

Warning: Taking a line of credit for the flexibility, then leaving it fully drawn for months means you end up paying a revolving rate higher than a business loan would charge, plus a service fee on your entire limit. If you know you will keep the money drawn, a more cost effective option is to take a business loan and stop paying for flexibility you are not using.
Important: Why a line of credit usually costs more than it looks
Two charges open the gap, and neither shows up clearly in a lender's headline number:
  • A higher interest rate - unsecured revolving credit is priced well above a secured business loan, sometimes by 15 percentage points or more
  • A service fee on your whole limit - charged every week whether you draw the funds or not, so any limit bigger than you need leaks money

For more details we suggest using our line of credit calculator which shows how much the service fee costs, and our business loan calculator which estimates repayments on a fixed sum.

Funding either option
  • Some lenders offer both options, so you can line up real offers before you commit.
  • As an example, Prospa, a trusted provider of business lending (and a MoneyHub partner) funds business loans from $5,000 to $500,000 and a line of credit up to $500,000, with a decision in about an hour and no property security required up to $150,000.
  • To get an idea of the cost, we suggest getting a fast quote from Prospa - checking your eligibility takes a few minutes and won't affect your credit score.

Frequently Asked Questions

Know this: Missing a repayment on a line of credit has real consequences. Dishonoured direct debits attract fees; repeated late payments can damage your ability to borrow in the future; and persistent arrears can put the going concern of your business at risk. If a facility is secured, the security can be repossessed if you do not keep up with repayments. If you are heading for trouble, contact the lender early, as most will work with a business facing temporary difficulty.​

Is a line of credit cheaper than a business loan?

It depends on how much you keep drawing.

What is the weekly service fee of a Line of Credit, and why does it matter?

The service fee is a small percentage of your full approved limit, charged every week regardless of how much you have drawn. It is the cost most borrowers overlook, because a lender's interest figure usually excludes it. The fee is the main reason to apply for a limit close to what you will realistically use, rather than the largest amount you can get approved.

What is the maximum limit for a business line of credit?

It depends on the size and cash flow of your business, but facilities of up to $500,000 are commonly available from specialist lenders. In practice, your approved limit is tied to your turnover, with many businesses qualifying for around 10% to 20% of annual revenue. The only way to know your number is to apply.

Will the minimum repayment clear my balance?

Not while funds remain drawn - the minimum weekly repayment is made up of interest, a small principal component (often 0.5% or 1% of the drawn balance) and the service fee. That principal slice is deliberately small, so paying only the minimum can leave a balance sitting for a long time. To clear it, you need to repay above the minimum or pay it off in full.

Can I repay a line of credit early?

Yes - you can repay the drawn balance at any time to stop interest accruing, which is exactly how the product is meant to be used. Check the contract for any early-repayment or exit fees, and remember that, in most cases, the service fee continues while the facility remains open.

How is a line of credit different from a business overdraft or credit card?

All three are revolving, but the pricing differs. A line of credit typically combines daily interest on the drawn balance with a service fee on the limit. A bank overdraft is usually cheaper if you can get one, but harder to qualify for. A business credit card can be cheaper still for short interest-free periods, but expensive if you carry a balance. To make an informed choice, you'll need to compare the all-in cost of each option in detail.

Where can I get the best line of credit deal?

  • Our guide to business loans explains everything you need to know, and popular alternatives. We also review Prospa, a specialised business lender.
  • Our guide to business credit cards outlines current offers available, and why business credit cards can be a low-cost alternative to applying for a business loan.
  • Having a good personal credit history is important - our guide to credit scores and reporting explains what you need to know.
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