Deciding between a business loan and a business line of credit? This guide helps NZ businesses learn if a lump-sum loan for growth or a flexible line of credit for cash flow is the right choice.
At a glance
- The most effective way to choose funding is to first identify your goal: a single, planned investment is often best for a loan, while a line of credit is built for managing unpredictable cash flow.
- A business loan offers the certainty of a fixed repayment schedule, whereas a business line of credit provides cost control by only charging interest on the funds you've drawn.
- Unsecured funding allows you to get approved based on your business's performance, providing a faster path to capital without needing to use personal assets as security.
When you need funding, it’s common to focus on the cost. But a better way to start is to consider the problem you need to solve. The right funding solution is the one whose structure is designed for your specific business goal, whether that’s a single, major investment or managing your day-to-day flow of cash. This guide will help you choose the most suitable option.
Business loan vs line of credit: what are they for?
While both provide access to capital, they are designed for two distinct business purposes: one is for funding strategic growth, while the other is for managing fluctuating cash flow.
Business loan
When you have a specific growth project in mind, a small business loan provides the capital and certainty to make it happen. It’s set up as a one-time lump sum that you repay over a set term, which is ideal for a significant, planned investment where you know the total cost upfront.
Let’s imagine you run a growing online retail store and you’re ready to expand by leasing your first warehouse. A loan provides the exact funds needed for the bond, rent, and fit-out costs in a single payment, giving you the capital to confidently execute your growth plan.
This is a common strategy for growth. Francis Swart, owner of the salon Gorgeous You, used a business loan to create a welcoming space for her clients.
“The premises were quite old and dilapidated. I needed to freshen them up and make it a beautiful space where people wanted to come, where it’s nice, cosy and inviting. That’s what Prospa helped me do.”
— Francis Swart, Gorgeous You owner
Business line of credit
A business line of credit is intended to help you handle unforeseen challenges without disrupting your operations. It offers a flexible funding facility up to an approved limit, where you can draw funds as needed and repay as you go, ensuring it is ready for the next time a need arises.
Using our online retail store example, imagine a large shipment of your key product arrives from overseas but is held at customs with an unexpected import tax bill that must be paid before the goods can be released. A line of credit allows you to draw the exact amount needed to clear the shipment immediately, preventing stock shortages and lost sales.
Debbie Delport, Director of Triple R Engineering, uses a line of credit as a safety net for managing supply chain uncertainty.
“We took the Prospa Business Line of Credit as a precaution. We rely heavily on getting our materials from overseas and saw an increase in costs and delays in delivery. I wanted to be prepared.”
— Debbie Delport, Triple R Engineering Director
Business loan vs. business line of credit at a glance
| Feature | Business Loan | Business Line of Credit |
|---|---|---|
| Best for | Large, planned, one-off purchases and strategic investments. | Managing ongoing, day-to-day cash flow needs. |
| Funding structure | A one-time lump sum paid into your account upfront. | Access to a pool of funds you can draw from as needed. |
| Repayments | A predictable schedule of fixed repayments over a set term. | Flexible repayments; you can pay down and redraw funds. |
| Cost model | You pay interest on the total loan amount from the start. | You only pay interest on what you use. |
The main difference between a business loan and a line of credit
The most significant difference between these two products is how the funds are delivered to your business, which is a direct result of the problem each is designed to solve.
Let’s return to our example of securing a warehouse. Imagine you’ve calculated the total upfront costs and you need $25,000 to move forward. A small business loan solves exactly this kind of challenge. The full $25,000 would be delivered to your account in a single transfer, giving you the exact capital required for the bond, rent, and fit-out. It’s funding for a specific, defined purpose.
Now, consider the unpredictable nature of running your online store. One week, a major corporate client pays their invoice late, leaving you short for payroll. The next, a shipment of your best product is held at customs with an unexpected tax bill. Then, you get a last-minute invitation to a high-profile trade show that requires an immediate fee to secure your spot.
This is where a business line of credit comes into play. With an approved facility, say, $25,000, acting as a safety net, you don’t receive the money upfront. Instead, when needed, you draw $7,500 to cover payroll, then another $4,000 to clear your goods from customs, and finally $2,500 to secure the trade show spot, all from the same facility. It provides a buffer to manage the natural peaks and troughs of your cash flow.
How the cost structure differs for each product
Another key difference lies in how costs and repayments are handled for each product.
With a business loan, there are no surprises. If you secure the $25,000 for the warehouse expansion, the repayment schedule is locked in from the beginning. You’ll have a clear plan of daily or weekly repayments, and you’ll know the exact amount of each one for the entire term, which makes cash flow forecasting simple. Because you receive the funds as a single lump sum, interest is calculated on the total $25,000 from the outset, and each repayment includes a portion of both the principal and the interest.
A business line of credit operates on a pay-for-what-you-use basis. Let’s return to our shipment being held at customs with an unexpected tax bill of $4,000. With a $25,000 facility, you would draw only the $4,000 needed to solve that specific problem. You only accrue interest on that outstanding $4,000, not the entire facility. Once you sell the cleared stock and repay the funds, the interest charges stop, and your full facility is available again.
Comparison: Accessing $25,000 with a business loan or line of credit
| Business Loan | Business Line of Credit | |
|---|---|---|
| The scenario | Your online store takes a $25,000 loan to fund its new warehouse fit-out | Your online store has a $25,000 facility to manage unforeseen expenses |
| Access to funding | The full $25,000 is delivered to your account upfront | You draw only the $4,000 needed to pay an unexpected customs bill |
| Repayment structure | Predictable, scheduled repayments (e.g., daily or weekly) over a set term | You can repay the $4,000 as you see fit, for example, over the next three months |
| Cost model | Interest is calculated on the total $25,000 loan amount from the start | Interest is only calculated on the outstanding $4,000 you have drawn |
| One-off vs ongoing | Once the final repayment is made, the loan is complete and the facility is closed | Once repaid, the full $25,000 facility is available again for future use |
How unsecured funding works
A common roadblock for business owners seeking funding has always been the need to use a personal asset, like their house, as security. This process can be slow, complex, and adds a significant layer of personal risk to a business decision.
This is precisely why both the Prospa Business Loan and Line of Credit do not require upfront security up to $150K. Instead of focusing on the value of your assets, the application focuses on the health of your business and its cash flow.
These are some of the benefits for you as the owner:
- It’s faster. With no need for lengthy property valuations, the application and approval process is quicker. In many cases, a decision can be made and funds can be in your account in under 24 hours.
- It’s simpler. The process involves less paperwork. For many applications, all that’s required are some basic business details, your NZBN, and access to your business bank account information.
- It brings peace of mind. It separates your business finances from your personal assets, allowing you to pursue growth opportunities with confidence, knowing your home isn’t on the line.
Unsecured funding means your application is assessed based on its performance and potential. This focus on your business itself is what makes securing capital faster and more straightforward, removing the hurdles many Kiwi businesses encounter with traditional lenders.
By now, you should have a clearer picture of which funding option best aligns with your goals. With the Prospa calculator, you can have a real-time projection of your weekly repayments and fees for both options.
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