Line of credit vs short-term loan: recurring gap or one-off cost?

The short verdict

Choose a short-term loan when the need is one-off, the amount is known and there’s a clear date by which it will be paid back.

Choose a line of credit when the gap keeps recurring — every fortnight, every month, every season — and you want money on standby rather than a new application each time.

The mistake we see most often is the mismatch: a one-off loan used to fund a recurring gap (so it needs replacing as soon as it’s repaid), or a line of credit used for a one-off cost (so it drifts and never gets repaid).

How do they compare?

	Short-term loan	Line of credit
Structure	Fixed amount, fixed repayments	Limit you draw from and repay
Interest charged on	The full amount, over the term	Only what’s drawn, while drawn
Ongoing fees	Usually none once repaid	Often a line or account fee on the limit
Speed to arrange	Faster	Slower
Speed to use	Each loan is a new application	Near-instant within the limit
Best for	A contract, stock buy, tax bill	Payroll gaps, stock cycles, slow payers
Risk of drift	Low — it has an end	Higher — it can stay drawn indefinitely
Repayment shape	Daily, weekly or monthly schedule	Flexible, often with a minimum

Which pattern is your gap?

Look at your last twelve months of bank statements and find the low points:

• One deep trough — say, a big tax payment or a one-off project — points to a short-term loan.
• Regular dips every month — often around wages and the 20th, when small employers pay PAYE to Inland Revenue — point to a line of credit.
• A long seasonal valley — a quiet winter or a pre-Christmas stock build — can suit either, depending on whether it’s predictable enough to set up a limit in advance.
• A steadily worsening line — each month lower than the last — means neither product is the answer on its own. Something in the business needs fixing first.

business.govt.nz recommends cash flow forecasting to avoid financial trouble and plan for growth. A forecast makes this choice almost obvious, because you can see the shape of the gap before it arrives.

How does the cost compare in practice?

Here’s an illustrative comparison using made-up numbers, purely to show the mechanics.

Illustrative example. An Auckland marketing agency needs about $40,000 for roughly ten days each month while it waits for client retainers to clear.

• Short-term loan: borrow $40,000 for six months. Interest and fees apply on the full amount for the whole term — even the twenty days a month the agency doesn’t need it.
• Line of credit: a $50,000 limit. The agency draws $40,000 for ten days, repays when retainers clear, and pays interest only on those ten days each month — plus any line fee on the limit.

For this pattern, the line of credit is likely to cost less overall. If the agency instead needed the full $40,000 for the entire six months, the comparison could easily flip.

The rule of thumb: the less of the month you need the money, the more a line of credit makes sense.

What about speed?

If the money is needed this week and no facility exists, a short-term loan is usually the faster answer. Setting up a line of credit involves approving an ongoing limit, which takes longer. A common sensible sequence is:

1. Now: a short-term loan to cover the immediate gap.
2. Next month: arrange a line of credit, while there’s breathing room.
3. From then on: use the line of credit for recurring gaps and keep one-off loans for genuine one-offs.

For truly urgent needs, see same-day business loans.

What are the warning signs you’ve picked the wrong one?

• Your line of credit hasn’t been near zero for months. It’s become a term loan, probably an expensive one. Consider converting the stuck portion into a loan with a defined end.
• You’ve taken a third short-term loan this year for the same kind of gap. The gap is recurring; a revolving facility would serve better.
• You’re paying a line fee on a limit you rarely touch. Reduce the limit or close it.
• Weekly loan repayments are causing the very gaps you borrowed to fix. The schedule doesn’t match your income timing.

Both products have their own detailed pages: business line of credit and short-term business loans.

Not sure which pattern you’re in? Show us the gap and we’ll suggest the structure that fits.

How does each handle a seasonal business?

Seasonal businesses sit right on the boundary. A short-term loan drawn before the quiet season, with repayments timed for the busy one, works well when the dip is predictable and the same size each year. A line of credit works better when the timing or depth of the dip varies, because you only draw what that particular year demands. Either way, the repayment schedule should follow your income, not the calendar. See funding a seasonal dip for structures that fit.

What do lenders need for each?

Short-term loan: bank statements, ID, purpose and repayment plan; property details if secured.

Line of credit: bank statements over a longer period, sometimes recent financial statements for larger limits, and a clear picture of how often you expect to draw. Some limits require security or a general security agreement.

Choose the shape, then the speed

The fastest money isn’t much use if it’s the wrong shape. Our application takes about a minute, there’s no credit check when you enquire, and it lands with one real person rather than being sent to a list of lenders. Describe your gap honestly — how often, how deep, how long — and we’ll come back with the structure that matches, and how fast it can be in place. Get started.