The difference between a term loan and a business line of credit comes down to how you receive the money and how you pay for it. A term loan gives you one lump sum that you repay in fixed installments over a set period, which makes it a strong fit for planned, one time investments. A line of credit gives you a borrowing limit you can draw from whenever you need cash, and you pay interest only on what you use, which makes it better for uneven or unpredictable expenses.
Both products are offered by banks, credit unions and online lenders, and their rates often overlap, so it is tempting to treat them as interchangeable. They are not. Choosing the wrong one can leave you paying interest on money that sits idle, or tie up all your borrowing power in a single project just when a slow season or a surprise repair hits.
This comparison covers how each product works in practice, what it really costs once fees are included, what lenders look for and a simple way to decide which one your business needs right now, or whether it makes sense to carry both.
How a term loan works
A term loan is the version of borrowing most people picture. The lender hands you a lump sum, and you pay it back with interest in regular installments until a set end date. Banks and credit unions tend to offer terms of three to ten years. Online lenders often go shorter, from six months to a few years, sometimes with weekly payments instead of monthly ones.
The big appeal is predictability. You know the payment, you know how many there are and you know the day the debt disappears. That makes a term loan easy to fit into a budget and a natural match for investments that pay off slowly.
Take a bakery replacing its main deck oven. Say the oven, installation and a bit of electrical work come to $100,000, financed at 10% over five years. The monthly payment lands around $2,125, and by the end the bakery will have repaid about $127,500. Every one of those sixty payments chips away at the balance until it’s gone, and meanwhile the oven is turning out more bread than the old one ever could.
Term loans can be secured by something of value, such as equipment, vehicles or property, or they can be unsecured. Unsecured loans almost always come with a personal guarantee from the owners. Secured loans usually unlock bigger amounts and lower rates.
How a business line of credit works
A line of credit works more like a reserve tank. The lender approves you for a maximum amount, say $50,000, and you draw from it whenever you need to. You pay interest only on what you’ve actually drawn. When you pay it back, that room opens up again for next time.
Consider a heating and cooling contractor, where spring is slow and summer is chaos. In April they draw $20,000 to cover wages and parts. At 18% APR, if they repay it all by the end of June when the rush brings cash back in, the interest comes to roughly $900. The other $30,000 of the line just sits there costing nothing, waiting for the next gap. Some lenders charge a small annual fee to keep a line open, but many don’t.
Limits usually run from around $5,000 to $500,000. Many lines are reviewed every year, and the lender may raise, trim or keep your limit depending on how the business is doing. Some lines are fully revolving. Others have a draw period followed by a repayment period where no new draws are allowed. It’s worth asking which kind you’re being offered, because it changes how flexible the line really is.
The differences that matter most
| Term loan | Line of credit | |
|---|---|---|
| How you get the money | All at once | As needed, up to a limit |
| Interest is charged on | The full amount, from day one | Only what you’ve drawn |
| Repayment | Fixed installments to a set end date | Flexible, based on your balance |
| Typical size | $5,000 to several million | $5,000 to $500,000 |
| Can you reuse it? | No, you’d need a new loan | Yes, as you pay it down |
| Best suited to | One time investments | Ongoing or unpredictable needs |
When a term loan is the right call
Reach for a term loan when you know what you’re buying and roughly what it costs. Opening a second location, renovating a dining room, buying out a partner, acquiring a competitor, or rolling several expensive debts into one cheaper payment are all classic term loan jobs.
What these have in common is a known price and a long payoff. Matching a long lived investment with a long repayment schedule keeps your payments small enough that the investment can earn its keep while you pay for it. Try funding a $150,000 renovation with a line of credit instead and you’ll likely max out the line for years, leaving nothing in reserve for the everyday surprises a line is supposed to handle.
Term loans also tend to offer the biggest amounts and the lowest rates for well qualified borrowers, especially through banks and SBA programs. If you need several hundred thousand dollars, a term structure is usually the practical choice.
One quick note on equipment. If you’re buying a specific machine or vehicle, look at equipment financing too. It’s a type of term loan where the equipment itself serves as collateral, which often makes approval easier and the rate lower than an unsecured term loan.
When a line of credit makes more sense
A line earns its place when your needs are real but hard to predict. Seasonal businesses use it to stock up before the busy months and pay it back when the sales roll in. Service businesses, such as marketing agencies and consultants, use it to cover payroll while clients take thirty, sixty or ninety days to pay. And nearly every business benefits from having one in the drawer for a broken compressor, a surprise tax bill or a supplier offering a discount for paying early.
The main advantage is that you only pay for what you use. If you took out a $50,000 term loan “just in case,” you’d be paying interest on all $50,000 every single month, whether you touched it or not. A $50,000 line costs little or nothing until the day you draw on it.
There’s a quieter benefit too. When a lender reports to business credit bureaus, drawing and repaying a line on schedule builds a track record, and that record can unlock larger limits and cheaper financing down the road.
The flexibility does come with a warning label, though. Because the money is always there, it’s easy to lean on a line to cover ongoing losses instead of temporary gaps. If your balance never seems to come down, the line has quietly turned into an expensive long term loan, and that usually signals a deeper cash flow problem worth tackling head on.
Comparing the cost honestly
On paper, rates for the two products overlap a lot. Bank versions for strong borrowers can start in the high single digits. Online lenders and alternative lending platforms often charge anywhere from the low teens to well above 30%, depending on credit, revenue and time in business. SBA backed versions sit near the bottom of the range, because the government guarantee reduces the lender’s risk and the SBA caps how far above the prime rate the lender can go.
In commercial lending, the real difference in cost usually comes from fees and structure, not the rate in big print. Term loans often carry an origination fee, deducted before the money arrives. Lines of credit may charge a fee on every draw, an annual fee or a maintenance fee. A line with a slightly higher rate but no draw fees can easily beat one with a lower rate and a 2% charge each time you use it.
The fairest comparison is to ask every lender for the APR and the full fee schedule, then think through how you’ll actually use the money. For a line, estimate how much you’ll draw, for how long and how often. For a term loan, look at the total you’ll repay and how much the origination fee shaves off what you receive.
What lenders want to see
Across business lending, the approval checklist is similar for both. If anything, lines of credit sometimes ask for a slightly stronger profile, because the lender is promising money you might draw months from now.
Banks usually look for a personal credit score of about 680 or higher, at least two years in business and revenue that comfortably covers your existing debts plus the new payment. Expect to hand over tax returns, financial statements and, for bigger requests, an explanation of how you’ll use the money.
Online lenders are more flexible. Many work with scores in the low 600s and businesses as young as six to twelve months, often with minimum annual revenue around $100,000. They lean heavily on recent bank statements to judge cash flow, and decisions can come in a day or two.
Whichever route you take, lenders want steady deposits, a manageable debt load and no recent string of overdrafts or bounced payments. Tidying those up before you start shopping helps both your approval odds and your rate.
Why not both?
Plenty of established businesses carry both, and it’s often the smartest setup. The term loan pays for the big, planned investment. The line sits in reserve for working capital and surprises. Keeping them separate makes it easy to see what each is for, and it stops a long project from swallowing the flexibility you need day to day.
The one thing to watch is your total debt load. Every lender looks at what you already owe, so taking a term loan first might shrink the line you can qualify for afterward, and vice versa. Think about which need is more urgent and which product will be harder to get, and borrow in that order. A number of lenders offer both products under one roof, which can make it easier to start with one and add the other later.
A quick way to decide
Ask yourself four questions. Do I know the exact amount I need? Will the money pay for something that lasts several years? Do I want the same payment every month? Will I need the money only once? If most of your answers are yes, a term loan is probably your best fit.
Now try these. Do my cash needs rise and fall through the year? Am I often waiting on customers to pay? Do I want a safety net for surprises? Would I rather pay nothing when I’m not using the money? If those sound familiar, lean toward a line of credit.
And if you’re still on the fence, compare real offers. On Compare Small Business Loans you can see which lenders offer term loans, lines of credit or both, along with their credit and time in business minimums, without any credit check.
The takeaway
Term loans and lines of credit aren’t really rivals. They’re tools for different jobs. A term loan gives you a set amount for a defined purpose with a clear finish line. A line of credit gives you flexible access to cash for needs you can’t fully predict. When the product matches the purpose, costs stay lower and cash flow stays steadier.
Before you borrow anything, jot down what the money is for, when you’ll need it and how you’ll pay it back. Those three answers will point you to the right product far more reliably than comparing interest rates on their own.
Frequently asked questions
Is a line of credit cheaper than a term loan?
It can be if you draw only part of the limit or pay it back quickly, since you pay interest only on what you use. If you draw the whole limit and carry the balance for years, a term loan with a similar rate is usually cheaper and easier to manage.
Which one is easier to get?
Short term loans from online lenders are generally the easiest to qualify for, followed by lines of credit from the same lenders. Bank and SBA versions of both are harder to get but cost less.
Will a business line of credit show up on my personal credit?
Most lenders check your personal credit when you request a line, and many ask for a personal guarantee. Whether the line itself appears on your personal report depends on the lender, so ask before you sign.
Can I pay off a term loan early?
Usually, but terms vary. Some lenders charge a prepayment penalty, others reduce the remaining interest when you pay early. With short term products priced using a factor rate, paying early may save little or nothing, so confirm the payoff rules in writing.