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.