How to choose between a loan and a credit line

Understand the two shapes of finance

The choice comes down to how the money is delivered and repaid. A term loan advances a single lump sum that you repay in fixed instalments over a set period — predictable and ideal for a known, one-off cost. A revolving credit line sets a credit limit you can draw against, repay, and draw again, paying interest only on what's outstanding.

Neither is better in the abstract; each fits a different kind of need. Choosing well means matching the structure of the finance to the structure of the cash requirement — get that right and the cost takes care of itself.

When a term loan fits

Reach for a lump-sum loan when the need is defined, one-off and upfront. Typical cases:

• Buying a specific asset — a vehicle, machinery, a fit-out.
• A known project cost with a clear price tag.
• Refinancing existing debt into one predictable repayment.

The strengths are certainty and budgeting: you know the total cost, the term, and the exact instalment from day one. The trade-off is that interest runs on the whole balance whether or not you've spent it, and idle borrowed cash is simply a cost — so a loan suits money you'll deploy in full, soon.

When a credit line fits

Choose a revolving line when the need is recurring, variable or hard to time — the classic shape of working capital. Typical cases:

• Bridging the gap between paying suppliers and customers paying you.
• Smoothing seasonal peaks and troughs in cash.
• Holding a standby buffer for unexpected costs.

Its strength is flexibility and cost control: you draw only when tight, repay when cash returns, and pay interest only on what you actually use. For an unpredictable need, that beats a loan whose interest runs regardless. A facility like Credicorp Flex is built for exactly this pattern.

Apply the decision framework

Three questions settle most cases:

1. Is the need one-off or recurring? One-off leans loan; recurring leans line.
2. Do you know the exact amount, or will it vary? Known sum leans loan; variable leans line.
3. Will you spend it all at once, or in dribs and drabs? All-at-once leans loan; as-needed leans line.

If you answer "recurring, variable, as-needed" you almost certainly want a credit line; "one-off, known, all-at-once" points to a term loan. To compare the real cost of any option whichever way you lean, run the figures through the true cost of borrowing calculator.

You can use both

The choice isn't always either/or. Many businesses run a term loan for the big, planned investment and keep a credit line alongside for the everyday ebb and flow of working capital — the right tool for each job rather than forcing one to do both.

Forcing a single facility to cover both purposes is where cost creeps in: a loan held as a standby buffer wastes interest, and a credit line stretched to fund a permanent asset can sit drawn for years. Match each need to its natural shape, and review the mix as the business grows. See working capital finance for where a line fits, and term loans for the lump-sum side.