The short answer
Use a term loan for a one-time, known-cost purchase such as equipment or an expansion. Use a line of credit for recurring or unpredictable cash needs, such as covering payroll while receivables are outstanding, because you pay interest only on what you draw.
Key takeaways
- A term loan delivers a lump sum and is repaid in fixed installments over a set period.
- A line of credit is a revolving limit: draw, repay and draw again, paying interest only on the balance.
- Match the product to the need: known one-time cost points to a term loan; uneven cash flow points to a line.
- Many established businesses keep both, each for a different purpose.
The core difference
A term loan hands you a fixed amount up front. You repay it in regular installments over a set period, and the loan is finished when the last payment is made.
A business line of credit gives you access to a limit. You borrow as little or as much as you need, up to that limit, and you pay interest only on what is currently drawn. As you repay, the available credit comes back.
Neither is better in the abstract. They solve different problems.
A cost example
Say a business needs $20,000 to cover a gap while customers pay their invoices, and it will need the money for about three months.
- Line of credit: Drawing $20,000 for three months at a 14 percent annual rate costs about $700 in interest. After repayment, the limit is available again.
- Term loan: Taking out a $50,000 term loan at 12 percent over 36 months, to be safe, means a payment of about $1,660.72 every month and roughly $9,786 of total interest, even if the business only needed the cash for a quarter.
The point is not that a line is always cheaper. It is that paying interest on money you do not need is the most common way to overspend on financing. The inverse also holds: using a line for a long-term purchase can cost more than a term loan if the line carries a higher rate or fees.
These rates are illustrative. Your actual terms depend on your profile and the lender.
When a term loan is the better fit
Choose a term loan when:
- The cost is known and one-time: buying a building, opening a second location or purchasing equipment (see equipment financing)
- You want predictable payments that you can plan around for years
- The asset or project will produce returns over a long period, which matches a longer repayment schedule
- You do not expect to need to borrow again soon
Learn more about business term loans and how lenders evaluate applicants.
When a line of credit is the better fit
Choose a line of credit when:
- Your cash needs are uneven: seasonal swings, delayed customer payments or irregular large purchases
- You want a safety net you can tap quickly without a new application each time
- You only need money short term and want to avoid paying interest on idle funds
- You are bridging a gap you expect to close with incoming receivables
See our business line of credit page, plus our guides to cash flow management and seasonal business financing.
A line of credit is a tool for timing gaps. If you are using it to cover a structural shortfall month after month, the underlying problem is profitability, and borrowing will not fix it.
Things to check on either product
Before you sign, confirm:
- Total cost. Ask for the APR and every fee: origination, draw, maintenance, annual and prepayment. See how to compare offers.
- Repayment mechanics. Monthly, weekly or daily payments; fixed or interest-only periods on a line.
- Security. Whether the lender takes a blanket lien or requires a personal guarantee.
- Renewal and limits. Lines are often reviewed periodically, and the lender may reduce or close the limit.
- Reporting. Whether payments are reported to business credit bureaus, which can help build your profile.
Using both together
Established businesses often hold both. A term loan funds the long-lived purchase, and a line of credit absorbs the timing gaps in day-to-day operations. If you are unsure which to start with, tell us what the money is for, how long you will need it and how your revenue arrives through the year. An advisor can help match that pattern to the right product.
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Frequently asked questions
Is a line of credit cheaper than a term loan?
It depends on how you use it. A line can cost less when you only draw money for a short time, because interest applies only to the drawn balance. For a large, long-term purchase, a term loan's fixed schedule can be cheaper and more predictable.
Can I have a line of credit and a term loan at the same time?
Yes. Many businesses do, as long as their combined payments are manageable. Lenders will look at your total debt service when you apply for the second product.
Do I pay interest on the whole limit of a line of credit?
Usually you pay interest only on the amount you have drawn. Some lines also charge fees on the unused portion or an annual fee, so check the full fee schedule.
Which is easier to qualify for?
Requirements vary by lender and by amount. Lines of credit are often smaller and are reviewed on revenue and cash flow, but approval is never assured with either product.
