Term loan vs line of credit in New Zealand.

A term loan is a lump-sum loan with a fixed term, typically 1 to 7 years, repaid on a fixed schedule (usually principal and interest in equal monthly instalments). A line of credit is a revolving facility with an approved limit, drawn and repaid as needed. Interest on a term loan accrues on the full balance from settlement; interest on a LOC accrues only on the drawn balance. Term loans suit one-off purposes; LOCs suit variable, ongoing needs.

On a like-for-like rate basis, a term loan typically prices 1 to 4 percentage points below an equivalent LOC. The gap reflects the lender's opportunity cost on the undrawn portion of the LOC and the higher administrative load on a revolving facility. However, on a total-interest basis, a LOC drawn for a short period (say, 4 months out of 12) commonly costs less in absolute dollars than a term loan for the full amount, because interest only accrues on the drawn balance for the actual draw time.

A term loan fits where the funding need is one-off, defined, and matched to a specific cost. Asset purchase (vehicles, plant, equipment), refinance of existing debt, fitout of new premises, and acquisition of another business are the canonical use cases. The cash-flow profile of these uses is predictable and structured, which matches the term loan's fixed-schedule repayment shape.

A LOC fits where the funding need is variable, ongoing, and demand-led. Seasonal stock builds, debtor-cycle smoothing in service industries, and opportunity-driven draws (a one-time supplier prepayment discount, an unexpected large order) are the canonical use cases. The cash-flow profile of these uses is fluctuating, which matches the LOC's draw-and-repay flexibility.

Yes, and many NZ business borrowers do. A common structure is a term loan funding a specific asset or refinance, alongside a LOC funding day-to-day working capital. The two products solve different problems and are widely viewed as complementary rather than competing. Lenders assess the combined servicing capacity at application; both products together must fit the business's cash flow.

A term loan accrues interest on the outstanding principal balance, calculated daily and billed monthly, with the principal amortising on a fixed schedule. A LOC accrues interest only on the drawn balance, calculated daily and billed monthly. If the LOC is undrawn (zero balance), no interest accrues, though some products charge a separate commitment fee on the undrawn portion of the limit.

Common fees on NZ business LOCs include an establishment fee at facility setup (commonly 0.5% to 2% of the limit), an annual review fee (commonly 0.5% to 2% of the limit, charged at each review), a line fee on the limit (some products), and a commitment fee on the undrawn portion (some products, commonly 0.5% to 1.5% per annum). Total cost of capital is the drawn-balance interest plus all applicable fees.

A LOC drawn to its limit and held there is widely read by the lender as a sign that the facility is being used as long-term funding rather than as working capital. At the next annual review, the lender commonly reduces or withdraws the limit. If the borrower cannot repay the existing drawn balance, the lender's default and recovery process begins, including any registered security and any personal guarantee. The widely observed sequence is: limit hit, review reduces the limit, default, recovery action.

Yes, subject to the contract. The annual review is the standard point at which the lender reassesses the limit. The lender can confirm, increase, reduce, or withdraw the limit based on the borrower's trading position, the lender's credit appetite, and the lender's overall portfolio position. This is a structural feature of revolving facilities and is one of the reasons LOCs are not appropriate for funding long-term needs.

Most NZ business term loans are fixed-rate for the contracted term, which means the monthly P&I payment is fixed for the term. Some products are floating-rate, where the rate (and therefore the payment) moves as the lender's base rate moves. Some larger commercial term loans use a fixed-floating hybrid: fixed for an initial period (say, 2 years), then variable for the remainder. The contract sets out which structure applies.

Interest on borrowing used for business purposes is generally deductible against business income for both term loans and LOCs, subject to the accountant's confirmation on the specific business position. The deductibility framework is set out in the Income Tax Act 2007 and IRD guidance. Mixed-use borrowing requires apportionment, which the accountant is the right person to confirm. Establishment fees and ongoing facility fees may be deductible as business expenses, again subject to confirmation.

All five major banks (ANZ, ASB, BNZ, Westpac, Kiwibank) offer business overdrafts (the bank-issued form of LOC), widely available alongside term loans on the same business banking relationship. Several alternative lenders (Prospa, Lumi, others) offer revolving credit lines, typically priced higher than bank overdrafts. Invoice finance specialists offer LOC-shaped products secured against the debtor book. Specialist asset-finance lenders generally do not offer LOCs because their products are asset-specific.

Switching is effectively a refinance. A new application is required, the new product is approved on its own terms, the existing product is repaid (and any break cost on a fixed-rate term loan is paid), and the new facility is set up. Some lenders facilitate the switch within an existing relationship; some require switching to a new lender. The right structure follows the funding need, so the switch decision typically follows a change in the underlying business position rather than a preference for the alternative product shape.