If your business needs capital, the two products you’ll run into most often are the business line of credit and the term loan. Both give you access to money, but they work differently, and picking the wrong one can mean paying more interest than you need to, or not having cash when you need it.
The short version: a term loan is for a specific, one-time expense, and a line of credit is for ongoing or unpredictable needs. Below, we break down how each works, what they cost, how to qualify, and how to decide.
Quick Comparison
| Feature | Business Line of Credit | Term Loan |
|---|---|---|
| How you get funds | Draw as needed, up to a limit | One lump sum upfront |
| Interest charged on | Only the amount you’ve drawn | The full loan amount |
| Repayment | Revolving: repay and borrow again | Fixed schedule until paid off |
| Typical amounts | $10,000–$250,000 | $25,000–$500,000+ |
| Typical terms | 6–24 months per draw, renewable | 1–10 years (up to 25 for SBA real estate) |
| Rates | Often variable | Often fixed |
| Best for | Cash flow gaps, inventory, emergencies | Equipment, expansion, acquisitions, refinancing |
Ranges are typical market figures and vary by lender, credit profile, and economic conditions.
What Is a Business Line of Credit?
A business line of credit gives you access to a set amount of money, your credit limit, that you can draw from whenever you need it. You pay interest only on the amount you actually use. As you repay what you’ve borrowed, that money becomes available again.
Think of it like a business credit card, but with higher limits, lower rates in most cases, and the ability to move cash directly into your bank account.
Example: You’re approved for a $75,000 line of credit. In March you draw $20,000 to buy seasonal inventory. You pay interest only on the $20,000. By June you’ve repaid it, and your full $75,000 is available again.
Types of lines of credit
- Secured lines are backed by collateral such as receivables, inventory, or real estate. They usually come with higher limits and lower rates.
- Unsecured lines require no specific collateral, but most lenders still ask for a personal guarantee, and rates tend to be higher.
- SBA CAPLines are SBA-backed lines of credit for working capital, seasonal needs, and contract-based financing.
Pros
- Flexibility: borrow only what you need, when you need it
- You pay interest only on what you draw
- Reusable without reapplying each time
- A good safety net for emergencies and uneven cash flow
Cons
- Variable rates mean your payments can rise
- Some lenders charge draw fees, maintenance fees, or annual fees
- Lower limits than term loans in most cases
- Lenders can reduce or freeze your line if your business weakens
- Easy access can lead to ongoing debt if you’re not disciplined
What Is a Term Loan?
A term loan gives you a lump sum upfront, which you repay in regular installments (usually monthly) over a fixed period. Interest is charged on the entire balance from day one, and once the loan is repaid, the account closes. If you need more money, you apply again.
Example: You borrow $150,000 over five years to open a second location. You receive the full amount at closing and make predictable monthly payments until it’s paid off.
Types of term loans
- Bank term loans: the lowest rates, but strict requirements and slower approval.
- SBA loans (7(a) and 504): government-backed loans with long terms and competitive rates; the paperwork is heavier.
- Online term loans: faster funding, sometimes in days, with looser requirements but higher costs.
- Short-term loans: repaid in 3–18 months, often with daily or weekly payments and factor rates instead of APR.
Pros
- Larger amounts are available
- Fixed rates and predictable payments make budgeting easier
- Longer repayment terms lower the monthly payment
- Well suited to investments that generate returns over time
- On-time payments help build business credit
Cons
- You pay interest on the full amount, even before you spend it
- No flexibility: borrowing more means a new application
- Prepayment penalties with some lenders
- Collateral and a personal guarantee are often required for larger loans
Key Differences Explained
1. How you access the money
This is the core difference. A term loan delivers everything at once, and a line of credit lets you take money in pieces. If you know exactly how much you need and when, a term loan fits. If you don’t, a line of credit avoids paying interest on idle cash.
2. Cost structure
With a term loan, interest accrues on the full principal from the start. With a line of credit, you pay only on your outstanding balance. That said, lines of credit often carry higher rates and extra fees, so for a large, long-term purchase, a term loan is often cheaper overall.
Always compare offers by APR, not just the interest rate or factor rate. APR includes fees and gives you the true annual cost. (See our guide: What Is APR vs Factor Rate on a Business Loan?)
3. Repayment
Term loans follow a fixed amortization schedule. Lines of credit usually require minimum payments on the drawn balance, and many have a draw period followed by a repayment period. Some lenders require you to repay each draw within 6–24 months.
4. Rate type
Term loans more often carry fixed rates. Lines of credit usually have variable rates tied to the prime rate, so when the Federal Reserve raises rates, your cost of borrowing goes up.
5. Qualification
Requirements overlap, but here’s what lenders typically look for:
- Banks: good to excellent personal credit (often 680+), 2+ years in business, solid annual revenue, and strong financial statements.
- Online lenders: credit scores as low as 600 in some cases (occasionally lower), 6–12 months in business, and minimum annual revenue, often around $100,000.
- SBA loans: good credit, a sound business plan, the ability to repay from cash flow, and an owner equity injection in many cases.
Lines of credit are often slightly harder to get from banks, because the lender is committing to available funds over time.
When to Choose a Line of Credit
A line of credit makes the most sense when:
- Your revenue is seasonal (retail, landscaping, tourism)
- You have to wait 30–90 days for clients to pay invoices
- You need to buy inventory before a busy period
- You want a safety net for repairs, emergencies, or unexpected opportunities
- Your expenses are recurring but irregular
When to Choose a Term Loan
A term loan is usually the better choice when:
- You’re making a one-time, large purchase like equipment, vehicles, or real estate
- You’re expanding: a new location, a renovation, or a major hire
- You’re buying a business or a franchise
- You want to refinance expensive debt into a lower, fixed payment
- You value predictable monthly payments
Rule of thumb: match the financing to the life of what you’re paying for. Long-lived assets go with long-term loans, and short-term needs go with revolving credit.
Can You Have Both?
Yes, and many established businesses do. A common setup is a term loan for growth investments plus a line of credit for day-to-day cash flow. Just make sure your total debt payments stay manageable. Lenders often look for a debt service coverage ratio (DSCR) of at least 1.25, meaning your cash flow is at least 25% higher than your debt payments.
What to Watch Out For
- Hidden fees: origination fees (often 1%–5%), draw fees, maintenance fees, and prepayment penalties.
- Factor rates disguised as low costs: a 1.2 factor rate on a 6-month loan can translate into a very high APR.
- Daily or weekly payments: these can strain your cash flow even if the total cost looks reasonable.
- Personal guarantees: understand that you may be personally liable if the business can’t repay.
How to Decide in 3 Steps
- Define the need. Is it a single, known expense or an ongoing or uncertain one?
- Estimate the cost. Run both options through in a Business Loan Calculator and compare APR and total repayment.
- Check your eligibility. Prequalify with several lenders. Many use a soft credit pull that won’t affect your score.
Frequently Asked Questions
Is a line of credit cheaper than a term loan? It depends on how you use it. If you only borrow small amounts for short periods, a line of credit can cost less because you pay interest only on what you draw. For large, long-term borrowing, a term loan usually has a lower total cost.
Which is easier to get, a line of credit or a term loan? With online lenders, both have similar requirements. With banks, lines of credit can be harder to get because the lender commits funds over time. Short-term online loans are often the easiest to qualify for, but they’re also the most expensive.
Does a business line of credit affect my credit score? Applying may trigger a hard inquiry. Afterward, the lender may report your payment history to business credit bureaus, and in some cases personal bureaus too, which helps your credit when you pay on time.
Can a startup get a line of credit or a term loan? It’s harder, but possible. Most lenders want at least 6–24 months of operating history. Startups often begin with SBA microloans, equipment financing, or business credit cards.
Can I use a line of credit to buy equipment? You can, but it’s often not ideal. Equipment financing or a term loan usually offers longer terms and lower rates, and the equipment itself serves as collateral.
The Bottom Line
Neither product is better in every case. Choose a term loan when you know exactly how much you need for a long-term investment and want predictable payments. Choose a line of credit when you need flexible access to cash for short-term or unpredictable expenses. Compare offers by APR, read the fee schedule carefully, and borrow only what your cash flow can comfortably support.
Sources: U.S. Small Business Administration (SBA.gov), Consumer Financial Protection Bureau (consumerfinance.gov), Federal Reserve Small Business Credit Survey.