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By Priya Nandra, Credit & Risk Editor. Published 6 May 2026. Last updated 13 July 2026.
Small-company borrowing comes in two basic shapes. A term loan is a single advance repaid over a fixed schedule: borrow once, repay, finished. A revolving facility is a standing limit drawn, repaid and drawn again without re-applying. Most directors meet whichever one a lender happens to put in front of them and assume that is the product for them. The better order is the reverse: characterise the need first, then pick the shape that matches it. As an underwriter, the mismatches are the applications that worry me — so here is the framework, with the failure modes named honestly.
Three questions that characterise a need
Is the size known? A VAT bill, a repair quote, a stock order for a confirmed job — these have a number attached. "Cashflow is tight some months" does not. Known-size needs suit a term loan sized to the number; variable needs suit a limit you draw against as the actual figure emerges.
Does it recur? A one-off is a one-off: borrow, resolve, repay, done. A rhythm — month-end payroll landing before month-end receipts, a seasonal dip every winter — will come back, and re-applying for a fresh loan every cycle is friction you will pay in time and, often, in fees. Recurring timing gaps are the revolving facility's home ground.
How fast does it arrive? Some needs give notice; some do not. A standing facility's defining virtue is that the approval already exists when the van fails on a Friday — drawdown is minutes, not an application. In our modelled figures — the Credicorp UK SME Cashflow Timing Dataset 2026, an illustrative model, not a survey — the median time from an obligation being identified to cash being needed is six days, and vehicle or equipment failure alone accounts for 12% of modelled borrowing events. Needs that arrive faster than an application can run are the strongest case for having a limit in place before you need it.
Where each shape wins
The term loan wins on known, one-off, finite needs. Its strengths are exactly its constraints: a fixed cost, a fixed schedule, and a built-in end date. There is no temptation sitting in the account afterwards, no limit quietly becoming part of the company's working assumptions. For a £400 repair or a materials purchase for one contract, borrow £400 for the weeks it is needed and be done. Our version is described on the business loans page — £50 to £500 over 14 to 84 days.
The revolving facility wins on variable, recurring, short-cycle needs — the classic being lumpy receivables: invoices land bunched at month-end while suppliers and wages want paying throughout. Draw £150 this month, repay in nine days when the invoices clear, draw £300 next month or nothing at all. Interest accrues only on what is drawn, only while it is drawn, so a well-run facility used for short dips costs less over a year than repeatedly borrowing fixed sums for fixed terms. The mechanics — drawdowns, minimum repayments, how the limit replenishes — are walked through in Credicorp Flex explained and inside Credicorp Flex: drawdowns and repayments.
The failure modes, named
Each shape has a characteristic way of going wrong, and both are worth stating plainly.
The term loan's failure mode is re-borrowing: taking a fresh loan each month to cover the same recurring gap. Each loan is individually sensible; the pattern is a revolving need being served by the wrong instrument, with an establishment fee and an application's worth of friction paid every cycle. If you have borrowed for the same reason three times in six months, the need is recurring — price a facility instead.
The revolving facility's failure mode is the permanent balance: a limit drawn and never really repaid, hardening from a bridge into a load-bearing part of the company's finances. Daily-priced credit is built for days, and a balance that never clears is the most expensive way to hold long-term debt. It is also a diagnostic: a facility that will not clear usually means the gap is not a timing gap at all but a trading shortfall — in our modelled trigger mix, genuine trading deterioration sits behind 7% of borrowing events, and it is the share that borrowing cannot fix. The honest test is in when not to take a short-term business loan; a company on the wrong side of it should be talking to free debt advice, not drawing down.
Cost, like for like
On our own pricing the comparison is deliberately simple, because both products share the same daily rate: 0.25% per day on what is outstanding. A £500 term loan over 60 days accrues £75 of interest plus a £5 establishment fee — representative example: borrow £500 for 60 days, repay £580; an early-settlement charge may apply. The same £500 drawn on a facility for nine days and repaid accrues £11.25. Neither number is better in the abstract: the term loan bought 60 days of certainty for a known need; the facility bought nine days of flexibility for a variable one. Shape matched to need is what "cheap" actually means here.
The short version
Known size, one-off, some notice: term loan. Variable size, recurring, little notice: revolving facility. Borrowing repeatedly for the same reason: you are in the wrong shape — switch. Balance that never clears: the problem is not the shape of the borrowing, and more borrowing is not the answer.