Working capital line vs term loan: which fits your UK SMB
Two different products with different shapes. UK SMBs often default to a term loan (fixed amount, fixed term, fixed monthly repayment) when a working capital line (variable drawdown, pay interest only on drawn balance) would fit better, and vice versa. This guide covers when each is the right choice, the cost differences, and how to model the decision.
Director, BestBusinessLoans
Oliver leads BestBusinessLoans's editorial reviews and methodology. With a background in UK commercial finance, he oversees lender research, rate verification and review independence.
Last reviewed: 11 May 2026
What a term loan actually is
A term loan is a fixed amount lent on day one and repaid in equal monthly instalments over a fixed period (typically 6 months to 6 years for UK SMB term loans). The interest rate is fixed for the term in most products. The borrower pays interest on the full outstanding balance through the term, regardless of whether the cash is being used. Suits one-off funding needs with clear use-of-proceeds: equipment purchase, fit-out, capex project, acquisition deposit, marketing investment for a defined period.
What a working capital line actually is
A working capital line (also called flexi-loan, revolving credit facility, or overdraft) is an approved facility size that the borrower draws against on demand. Interest accrues only on the drawn balance. The borrower can drawdown, repay, and redraw within the facility during the agreed period (typically 6 to 36 months). Suits ongoing working-capital cycles with variable cash need: paying suppliers ahead of customer receipts, seasonal stock build, irregular monthly cash gaps. UK examples: iwoca flexi-loan, NatWest business credit line, Barclays business overdraft.
Cost comparison: when each is cheaper
Term loan: lower headline APR (typically 6-15% for UK SMB), but you pay interest on the full balance through the term. Working capital line: higher headline APR (typically 8-18% for UK SMB), but you pay interest only on drawn balance. Math: if you use 100% of the facility 100% of the time, the term loan is cheaper. If you use 50% of the facility on average, the working capital line is cheaper despite the higher rate. The crossover point is roughly 70-80% average utilisation; above that, term loan; below that, working capital line.
Which fits which use case
Term loan fits: one-off equipment purchase, fit-out cost, marketing campaign, acquisition cash, project costs with defined timeline, debt consolidation, refinance of stacked facilities. Working capital line fits: ongoing seasonal cash gaps (retail, hospitality, agriculture), customer payment cycle bridging (services, manufacturing with long debtor days), supplier prepayment cycles (e-commerce, distribution), variable monthly volume businesses. Some businesses run both alongside: term loan for capex, working capital line for cycle management.
UK provider mapping
Term loan specialists: Funding Circle, Allica Bank, OakNorth, the clearing banks. Working capital line specialists: iwoca (flexi-loan), Capital on Tap (revolving credit card line for smaller tickets), the clearing banks for established customers (overdraft, revolving credit). Most UK SMB lenders offer both products; the underwriting is similar but the pricing and structure differ. Compare both quotes when applying, even if you think you know which product fits.
When neither is the right answer
Sometimes the right answer is invoice finance (B2B receivables-led), MCA (card-flow-led for retail and hospitality), asset finance (against specific equipment), or a structured ABL facility. The choice of working capital line vs term loan only makes sense if both options actually fit the underlying need. For pure receivables-driven cash gaps, invoice finance usually beats both on cost. For pure card-flow seasonal businesses, MCA usually beats both on alignment with the trading cycle. Don't default to term loan vs working capital line without checking whether either is the right product.
FAQ
What's the difference between a flexi-loan and an overdraft?
Mechanically similar, both are revolving credit facilities you draw against on demand, paying interest only on drawn balance. Differences: flexi-loans (iwoca, fintech specialists) are usually standalone products with their own application and approval; overdrafts are tied to the business current account and are usually approved as part of the banking relationship. Flexi-loans often have higher facility sizes available; overdrafts are typically capped at a smaller size relative to turnover.
Can I have both a term loan and a working capital line at the same time?
Yes, common arrangement. Lenders aggregate across products when assessing affordability so the combined repayment burden has to fit within the borrower's capacity, but running term loan + working capital line alongside is standard for established UK SMBs. The combined facility set is usually negotiated as part of the broader banking relationship rather than approved as two separate transactions.
Which product is faster to approve?
Working capital lines from fintech specialists (iwoca, Capital on Tap) are usually fastest, 24 to 72 hours from application to approval. Term loans from the same lenders typically 3 to 10 days. Clearing bank products on either side are slower, 2 to 6 weeks. Speed of approval shouldn't drive the product choice if the underlying need doesn't fit the chosen product.
Can I switch from a term loan to a working capital line mid-loan?
Usually not without refinancing the term loan in full. Some lenders offer hybrid structures (a term loan with a small revolving sub-facility for cycle management) but converting a vanilla term loan into a working capital line mid-loan typically requires repaying the term loan and applying for the working capital line separately.
What's the typical facility size on each?
UK SMB term loans range £10k to £500k (with bank-tier files going higher, up to £5m+ at challenger banks like Allica or OakNorth). Working capital lines typically £1k to £500k for fintech specialists, larger for established bank customers. Above £500k facility size, structured commercial finance routes (asset-based lending, structured credit) typically engage rather than vanilla term loan or working capital line.
Will my credit score affect which product I qualify for?
Yes, materially for both products. Working capital lines are usually easier to qualify for at smaller ticket sizes because the rolling drawdown model gives the lender ongoing visibility on the borrower's position. Term loans are usually harder at smaller tickets because the full amount is committed upfront. At larger ticket sizes the asymmetry reverses: term loans are easier because the use of proceeds is documented, working capital lines are harder because the lender takes on undrawn-balance risk.
Reviewed by Oliver Mackman, Director. Last reviewed: 2026-05-11.