A business line of credit is revolving money you draw and repay as needed, paying interest only on what you use. A term loan is a lump sum repaid on a fixed schedule. Use a line of credit for recurring short-term gaps like payroll, inventory and slow-paying customers. Use a term loan for one-time investments that pay back over years.
Key takeaways
- Line of credit: flexible, interest only on the drawn balance, usually renewed every 12 to 24 months.
- Term loan: fixed payments over 1 to 10 years, often a lower rate for long-term needs.
- Many healthy businesses use both: a term loan for growth and a line for working capital.
- Never use a line of credit to fund a long-term asset you can’t pay off within the draw period.
Line of Credit vs. Term Loan at a Glance
| Line of credit | Term loan | |
|---|---|---|
| How you get funds | Draw as needed up to a limit | One lump sum |
| Interest | Only on the balance drawn | On the full amount from day one |
| Repayment | Revolving; minimum payments or interest-only | Fixed monthly payments |
| Term | 12 to 24 months, renewable | 1 to 10 years |
| Typical sizes | $10,000 to $1 million+ | $25,000 to $5 million+ |
| Best for | Payroll, inventory, receivables, emergencies | Expansion, equipment, acquisitions, refinancing debt |
| Risk | Lender can reduce or not renew the line | Payment due whether or not revenue comes in |
When a Line of Credit Wins
- Seasonal businesses that build inventory before peak season and pay it down after.
- Contractors and B2B firms waiting 30 to 90 days on invoices. See working capital for contractors.
- Uneven payroll as you hire ahead of new contracts.
- A safety net you open while things are good and rarely touch.
When a Term Loan Wins
- Buying equipment, vehicles or a second location.
- Acquiring a competitor or buying out a partner.
- Refinancing expensive short-term debt, including merchant cash advances.
- Projects with a predictable payback over 2 or more years.
Cost Example
You need $100,000 for inventory for four months each year. A line of credit at 12% costs about $4,000 in interest per year if you repay after four months. A $100,000 term loan at 10% over three years costs about $8,600 in first-year interest because you borrow the full amount up front, including the months you don’t need it. For a short need, the line is cheaper despite the higher rate.
Flip it: for a $100,000 machine that pays back over four years, a term loan or equipment financing keeps payments predictable and protects your line for working capital.
Qualifying for Each
Bank lines usually need 2+ years in business, solid credit and annual financial statements, and some require you to pay the balance to zero for 30 days each year. Private lenders offer lines with 6 to 12 months of history, but at higher rates and with weekly or monthly payments. Term loans from banks and the SBA need full documentation; private term loans rely more on bank statements. Compare the options in SBA 7(a) vs. private term loans.
Frequently Asked Questions
Is a line of credit better than a loan?
Not always. A line of credit is better for short, recurring needs because you pay interest only on what you use. A term loan is better for long-term investments that pay back over several years.
Can a lender cancel a business line of credit?
Yes. Lenders review lines at renewal and can reduce or close them if revenue, credit or collateral weakens. That is why a line should not fund long-term assets.
Can I have both a line of credit and a term loan?
Yes. Many businesses use a term loan for growth investments and a line of credit for working capital, as long as total debt service fits cash flow.
Have a deal in mind? Want to compare line and term options for your business? Tell us about the deal and we will match it with the lenders that fit.