What is the difference between a loan and a credit facility?

What a loan is

A business loan is a one-off advance: the lender pays an agreed amount into your account and you repay it over a fixed term, typically in regular instalments of capital plus interest. You know the total cost and the end date from the outset, which makes budgeting straightforward and predictable. Because the full sum is advanced immediately, interest accrues on the whole balance from day one, whether or not you deploy it all at once. Loans are well suited to a specific, quantifiable purpose — buying equipment, funding a defined project, or covering a known bill — where you need the entire amount up front and want a clear, committed repayment plan you can rely on.

What a credit facility is

A credit facility is a standing arrangement: the lender approves a maximum limit, and you draw funds when you need them, up to that ceiling. As you repay, your available headroom is restored, so you can borrow again without reapplying each time. Crucially, you usually pay interest only on the balance you have actually drawn, not on the full limit sitting available. This revolving structure mirrors how working capital really behaves — money flowing in and out as invoices are raised and settled — which is why facilities suit ongoing, variable cash-flow needs rather than a single fixed cost. An overdraft and a revolving credit line are both common forms of facility.

Cost and flexibility compared

The trade-off is predictability versus flexibility. A loan gives you certainty — a known total and a fixed end date — but you carry, and pay for, the whole sum even if you didn't need every pound immediately. A facility gives you flexibility and can work out cheaper if you dip in and out, because you pay for usage rather than the headline limit. The catch is that limits, fees and availability terms apply, and some facilities charge a small non-utilisation or arrangement fee simply for keeping the line open and ready. Neither is inherently better; the cheaper option depends entirely on how, and how continuously, you actually use the money.

Which fits which need

Match the product to the shape of your spending, not the other way round. If the need is a single, defined cost with a clear payback — a one-off purchase, a project, a tax bill — a loan is usually the cleaner choice, because the certainty is worth more than the flexibility. If the need is smoothing irregular cash flow — covering payroll between client payments, topping up stock seasonally, bridging slow-paying customers — a facility's draw-and-repay structure fits far better. Many companies sensibly run both at once: a term loan for a major purchase alongside a facility for day-to-day swings. Lenders assess your total exposure either way.

What this means for your company

Credicorp provides short-term working-capital finance to UK limited companies and lends to the company itself, assessed on its trading and cash flow, with no director's personal guarantee. Whichever structure you choose, the discipline is the same: borrow against a real, near-term need and repay as the expected cash arrives, rather than rolling short-term money on indefinitely. Talk through your cash cycle before committing, so the structure tracks how money actually moves through your business. For related detail see working capital finance and overdraft versus business loan.