Funding Products
Business Line of Credit vs Term Loan: Which One Do You Need?
Both products deliver capital, but they behave very differently once the money is in your account. The choice comes down to whether your need is recurring and unpredictable or one-time and defined.
How a line of credit works
A line of credit is a revolving limit you draw against as needed. You pay only on what you draw, and as you repay, the available limit is restored. Draws are typically instant once the line is open.
That makes it ideal for businesses with lumpy revenue, recurring inventory cycles, or the kind of surprise expenses that show up two or three times a year.
How a term loan works
A term loan delivers a lump sum with a fixed repayment schedule. Payments are predictable, the total cost is known upfront, and there is no temptation to keep re-borrowing.
It suits a single, quantified investment — a build-out, an acquisition, a large equipment purchase, or consolidating several expensive short-term positions into one manageable payment.
Cost comparison
- Line of credit: interest on the drawn balance only, sometimes a small draw or maintenance fee; cheaper if used sparingly
- Term loan: interest on the full amount from day one; cheaper per dollar if you genuinely need the whole sum
- Lines usually carry a higher rate but lower total cost for short, intermittent use
- Term loans usually carry a lower rate but you pay for every dollar for the entire term
Which to choose
If you cannot name the exact dollar amount and the exact date you need it, you want a line of credit. If you can name both, you want a term loan.
Many established businesses hold both: a term loan for the growth project and an open line kept in reserve so the next surprise never becomes an emergency.
Frequently asked questions
- Can I have a line of credit and a term loan at the same time?
- Yes, and it is common. Lenders will consider your combined obligations when sizing the second facility.
- Does an unused line of credit cost anything?
- Sometimes. Some lines carry a small monthly maintenance or non-use fee, which should be disclosed in the offer.
- Which is easier to qualify for?
- Short-term working capital and revenue-based products are generally the easiest; conventional lines and term loans require stronger credit and history.