Comparison Guide

Term Loan vs Line of Credit

Both are popular business financing options, but they serve different needs. Here's how to choose.

Quick Comparison

Feature	Term Loan	Line of Credit
How it works	Lump sum upfront	Draw as needed
Typical amount	$50k–$2M+	$25k–$500k
Interest rate	8–35% APR	12–45% APR
Term length	12–36 months	6–24 months
Payment structure	Fixed monthly	Interest on drawn amount
Reusable?	No	Yes (revolving)
Best for	One-time expenses	Ongoing cash flow

Business Term Loan

A lump sum of capital provided upfront that you repay over a fixed period with regular installments. Like a traditional loan.

How It Works:

Apply for a specific loan amount
Receive full amount at closing
Make fixed monthly or weekly payments
Pay principal + interest until fully repaid

Pros:

✓Predictable fixed payments
✓Lower rates than lines of credit
✓Larger loan amounts available
✓Longer repayment terms (12-36 months)
✓Good for one-time large expenses

Cons:

×Must repay entire amount even if needs change
×Not reusable (need new loan for more funds)
×More documentation required
×Origination fees typically 2-5%

Business Line of Credit

A revolving credit line you can draw from as needed. Similar to a business credit card but with higher limits and better rates.

How It Works:

Get approved for a credit limit
Draw only what you need, when you need it
Pay interest only on drawn amount
As you repay, credit becomes available again

Pros:

✓Pay interest only on what you use
✓Revolving access throughout term
✓Flexible for fluctuating needs
✓Fast approval and funding
✓Less documentation than term loans

Cons:

×Higher interest rates (12-45%)
×Shorter terms (6-24 months)
×Lower credit limits than term loans
×May have draw fees or maintenance fees
×Can be tempting to over-borrow

When to Choose Each

Choose a Term Loan if you:

Need a large amount ($50k+)
Have a specific one-time expense (equipment, expansion, acquisition)
Want predictable fixed payments
Can afford longer commitment (2-5 years)
Prefer lower interest rates

Choose a Line of Credit if you:

Have fluctuating or seasonal cash flow
Need ongoing access to working capital
Want to pay interest only on what you use
Need flexibility for multiple expenses
Want a financial safety net

Real-World Examples

Example 1: Restaurant Expansion

Scenario: A restaurant owner needs $150k to open a second location. Costs are known upfront (build-out, equipment, initial inventory).

✓ Best choice: Term Loan

One-time expense, large amount, predictable repayment. Lock in fixed rate over 3-5 years.

Example 2: Seasonal Retail Business

Scenario: A retail store needs to stock inventory before holiday season but cash flow is tight. Revenue will spike in Q4.

✓ Best choice: Line of Credit

Draw for inventory, repay with holiday sales, reuse for next season. Flexible and cost-effective.

Example 3: Construction Company Growth

Scenario: A contractor has multiple projects but waits 30-60 days for client payment. Needs to cover payroll and materials upfront.

✓ Best choice: Line of Credit

Ongoing cash flow gaps. Draw as projects start, repay when clients pay, repeat. Revolving access is key.

Still not sure which is right for you?

Talk to a specialist who can review your situation and recommend the best option.

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