Term Loan vs Revolving Credit - Which Suits Your Business?
Choosing business funding often feels more complicated than it should.
Term loans and revolving credit facilities are two of the most common options available to UK SMEs, yet the difference between them is not always clear. Both provide access to capital, but they behave very differently once repayments begin.
Understanding how each option interacts with cashflow can make a meaningful difference. The right structure can support growth and planning. The wrong one can add pressure, even when the business is performing well.
This guide breaks down the difference between term loans and revolving credit facilities, helping you decide which structure fits the way your business operates today.
What Is a Term Loan and How Does It Work
A term loan is one of the most familiar forms of business funding for UK SMEs.
In simple terms, a business receives a fixed amount of money upfront and repays it over a set period. Repayments usually happen monthly and include both capital and interest. The structure stays the same from the first payment to the last.
Because everything is agreed in advance, term loans offer predictability. Businesses know exactly how much they will repay each month and when the loan will end. This can feel reassuring, especially when planning longer-term investments.
How term loans are typically used by SMEs
Term loans tend to suit situations where costs are clear and one-off.
Common examples include:
- Purchasing equipment or vehicles
- Expanding premises
- Funding a specific project with defined costs
- Making a large investment with a long payback period
In these cases, receiving the full amount upfront makes sense. The business pays for the investment, then repays the loan steadily as the benefit of that investment is realised over time.
What to consider before taking a term loan
While term loans are straightforward, their structure matters.
Interest is usually charged on the full amount from the start, even if the business does not need all the cash immediately. Repayments begin shortly after funds are received, regardless of how revenue flows in.
This means term loans work best when cash inflows are stable and predictable. When revenue timing varies or funding needs repeat, the fixed nature of a term loan can feel restrictive.
Understanding how a term loan behaves over time is essential. It helps businesses judge whether predictability outweighs flexibility for the decision they are making.
What Is a Revolving Credit Facility
A revolving credit facility is a form of working capital funding designed for businesses with recurring cashflow needs.
Instead of taking a fixed amount once, a business is approved for a credit limit and can draw funds as needed, repay them as revenue comes in, and reuse the facility over time. Interest is typically charged only on the amount drawn.
Because the structure is reusable, it suits businesses where costs and income do not line up neatly month to month.
If you want a detailed breakdown of how revolving credit facilities work, including mechanics, eligibility, and repayment structure, we have covered this in depth here.
For the purpose of this guide, what matters most is how this structure behaves compared to a term loan when it comes to cashflow.
Term Loan vs Revolving Credit Facility at a Glance
The table below highlights the key structural differences between a term loan and a revolving credit facility. It focuses on how each option works in practice, rather than which one is “better”.
This distinction becomes especially important once a business starts managing multiple cashflow cycles at the same time.
Not sure which structure fits your cashflow? Use our free calculator to see how much you could access with Juice Flex and compare vs a term loan.
How Each Option Affects Cashflow in Practice
The biggest difference between a term loan and a revolving credit facility shows up once repayments begin.
On paper, both provide access to capital. In practice, they interact with cashflow in very different ways.
Cashflow with a term loan
A term loan delivers certainty. The amount received is fixed, and the repayment schedule is agreed upfront. This works well when cash inflows are steady and predictable.
Each month, the business makes the same repayment regardless of what revenue looks like in that period. This can simplify budgeting, but it also means repayments do not adjust if income dips or costs rise unexpectedly.
For businesses funding a single project or asset, this structure often fits well. The investment is made once, and repayments are spread over time as the benefit of that investment is realised.
Where challenges arise is when cashflow timing shifts. If revenue is delayed, seasonal, or uneven, fixed repayments can add pressure during quieter months. The loan behaves the same way even when the business does not.
Cashflow with a revolving credit facility
A revolving credit facility interacts with cashflow more dynamically.
Funds are drawn when costs arise and repaid as revenue comes in. When the balance is reduced, available credit increases again. This allows funding to move in step with the business rather than on a fixed timetable.
This structure suits situations where cashflow gaps repeat. Payroll, inventory orders, marketing spend, and VAT payments often occur before income is received. A revolving facility allows businesses to smooth these gaps without committing to repayments that ignore timing.
The key difference is optionality. Businesses can choose when to draw, how much to draw, and when to repay, within the agreed terms. This flexibility can reduce the need for reactive decisions during tighter periods.
Why this matters as businesses grow
As businesses scale, cashflow patterns often become more complex. Multiple costs overlap. Revenue streams arrive at different times. Gaps become more frequent, even when the business is profitable.
In these situations, the way funding behaves can matter as much as the amount available. A structure that aligns with timing can create headspace and support planning. A structure that ignores timing can increase pressure, even if the headline cost appears lower.
Understanding how each option affects day-to-day cash movement helps businesses choose funding that supports growth rather than constrains it.
Why cashflow visibility matters as much as flexibility
A revolving facility gives you optionality, but it doesn't tell you when to use it or how much headroom you have next month.
This is where Juice is different. We pair Flex with Insights – a free cashflow intelligence tool that connects to your accounting software and shows you upcoming gaps before they arrive.
You don't just get flexible funding. You get visibility and control over when and how to use it.
It's funding that helps you plan, not just react. Explore revolving credit facility in more detail.
Choosing the Right Option Based on Business Needs
For most SMEs, the decision between a term loan and a revolving credit facility comes down to how funding needs show up over time.
The table below compares both options across the factors that usually matter most in practice.
Term Loan vs Revolving Credit Facility: Practical Comparison
How to use this comparison
If funding is required for a single decision with a clear cost and timeline, a term loan can provide structure and predictability.
If funding needs repeat across months or seasons, and cash inflows follow costs rather than lead them, flexibility tends to matter more. In these cases, a revolving structure often aligns more naturally with how cash moves through the business.
The right choice is rarely about which option is cheaper on paper. It is about which structure creates fewer friction points as the business operates and grows.
Which Option Suits Different Types of Businesses
The way a business earns revenue often determines which funding structure fits best. Looking at how cash moves day to day can make the decision clearer than focusing on product labels.
Businesses with project based or asset led costs
Companies that fund specific projects, equipment, or expansions often lean toward term loans.
Examples include:
- Professional services firms opening a new office
- Manufacturers purchasing machinery
- Businesses acquiring vehicles or long-life assets
In these cases, costs are usually clear upfront and the benefit is realised over a longer period. A fixed repayment schedule can align well with predictable returns from the investment.
Businesses with recurring working capital needs
Businesses that face regular timing gaps often benefit from more flexible structures such as revolving credit facilities.
This includes:
- Retailers ordering stock ahead of peak trading periods
- Agencies paying staff before invoices are settled
- E-commerce businesses funding marketing before conversion
- Seasonal businesses managing uneven revenue across the year
When funding needs repeat themselves, accessing capital once and reusing it across cycles can reduce friction. It allows planning around timing rather than securing new funding for each gap.
Growing businesses with changing priorities
As businesses grow, funding needs often evolve.
Early on, a term loan may support a clear expansion decision. Over time, as operations become more complex, working capital demands tend to increase. Multiple costs overlap. Revenue streams diversify. Timing becomes less predictable.
In these situations, flexibility can support decision making. Funding that adapts as needs change can help businesses maintain control as they scale.
Choosing between a term loan and a revolving credit facility often reflects where a business sits today and where it expects to be over the next year or two.
Common Mistakes SMEs Make When Choosing Funding
Funding decisions are often made under pressure. When time is tight, it is easy to focus on speed or headline cost rather than structure. This is where problems usually begin.
1. Choosing funding based on urgency alone
One common mistake is selecting the fastest option available without considering how it behaves over time.
Quick access can solve an immediate issue, but if repayments do not align with cashflow, pressure often returns within weeks. What helped in the moment can create a longer cycle of stress.
2. Using one off funding for recurring needs
Another frequent issue is using term loans or short term products to cover gaps that repeat.
Payroll, inventory, and marketing costs rarely disappear after one cycle. When funding is structured as a one time solution, businesses may find themselves reapplying or stacking products to cover the same timing gaps.
3. Underestimating the impact of fixed repayments
Fixed repayments provide certainty, but they also reduce flexibility.
When revenue fluctuates or costs rise unexpectedly, fixed obligations can limit options. Businesses may delay growth decisions or cut essential spend to meet repayments, even when demand exists.
4. Overlooking visibility and planning
Funding decisions made without a clear view of upcoming cashflow tend to create surprises.
Even simple forecasting can highlight whether funding needs are temporary or structural. Without this context, it becomes harder to choose the right structure and easier to repeat the same mistakes.
Avoiding these pitfalls often comes down to matching funding to how the business actually operates, rather than how it looks on paper at a single point in time.
5. Making the Right Funding Choice With Confidence
Both term loans and revolving credit facilities play a role in SME finance. The difference lies in how they behave once the money is in use.
Term loans suit clear, one-off decisions with defined costs and predictable returns. Revolving credit facilities support businesses where cash moves in cycles and funding needs repeat over time.
Choosing between them becomes easier when the focus shifts from product names to cashflow patterns. How often funding is needed. When costs arise. How predictable revenue is. How much flexibility matters as the business grows.
Funding that aligns with how cash actually moves can reduce pressure and support better decision making. It gives businesses more control, clearer planning, and confidence to act when opportunities appear.
If you’re exploring funding options and want to understand more about how a revolving credit facility works, the type of businesses we fund or have any questions, contact our team:
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