A business line of credit provides revolving access to funds you can draw from as needed, while a term loan provides a one-time lump sum you repay over a fixed period.
The fundamental difference is structure: lines of credit flex with your needs, term loans deliver a defined amount for a defined purpose.
Neither is universally better.
The right choice depends on what you need funding for, how predictable that need is, and how you prefer to manage repayment.
Understanding how each works helps you pick the option that fits your situation.
How Business Lines of Credit Work
A line of credit functions like a pool of money you can access whenever you need it.
You get approved for a maximum amount, say $50,000. That credit sits available until you need it. Draw $10,000 this month to cover a cash flow gap. Repay it when revenue catches up. Draw $25,000 next quarter for inventory. Repay as sales come in. The credit becomes available again as you pay it down.
You only pay interest on what you actually use. If you have a $50,000 line and draw nothing, you owe nothing (aside from any maintenance fees, which vary by lender). Draw $15,000 and you pay interest on $15,000.
This revolving structure makes lines of credit ideal for ongoing, variable needs. Cash flow management. Unexpected expenses. Opportunities that arise without warning. The credit is there when you need it without applying for a new loan each time.
According to the Federal Reserve’s Small Business Credit Survey, lines of credit were the most commonly used financing product among small businesses, ahead of term loans, business credit cards, and other options. The flexibility explains the popularity.
How Term Loans Work
A term loan delivers a lump sum upfront that you repay over a set period through regular payments.
You borrow $50,000. You receive $50,000. You repay it plus interest over 12 months, 24 months, 5 years, whatever the term specifies. The payment amount and schedule are fixed from the start.
This structure works well for defined, one-time needs. Purchasing equipment. Funding a renovation. Buying inventory for a specific season. Expanding to a new location. You know what you need, you get that amount, you pay it back.
Term loans come in short-term and long-term varieties. Short-term loans typically repay within 3 to 24 months with daily or weekly payments. Long-term loans stretch over years with monthly payments. The right term length depends on your purpose and repayment capacity.
💡 Pro Tip
The smartest funding decisions come from understanding the full cost, not just the monthly amount. Visit our guides for more exclusive tips.
Key Differences Between the Two
Several factors distinguish lines of credit from term loans beyond the basic structure.
Access to Funds
With a line of credit, funds are available on demand once approved. Need money Tuesday? Draw it Tuesday. No new application required.
With a term loan, you receive funds once at the beginning. Need more money later? Apply for another loan.
Repayment Structure
Line of credit payments vary based on how much you’ve drawn. Draw more, pay more. Draw nothing, pay little or nothing.
Term loan payments are fixed from day one. You know exactly what you owe each month regardless of how business is going.
Interest Calculations
Lines of credit charge interest only on outstanding balances. Borrow $10,000 of your $50,000 line and interest accrues on $10,000.
Term loans charge interest on the full borrowed amount according to the amortization schedule. Even as you pay down principal, the total interest was calculated on the original loan amount.
Reusability
Lines of credit revolve. Pay down what you borrowed and that credit becomes available again. One approval provides ongoing access.
Term loans are one-time transactions. Once repaid, the loan is closed. Need more? Apply again.
Best Use Cases
Lines of credit suit ongoing, unpredictable needs. Cash flow management. Working capital. Emergency access.
Term loans suit specific, defined purposes. Equipment purchases. Expansion projects. Inventory for a particular season.
✓ 6+ months in business
✓ $15,000+ monthly revenue
✓ Active business bank account
When to Choose a Business Line of Credit
Lines of credit shine in certain situations.
Cash Flow Management
If your revenue fluctuates but expenses stay steady, a line of credit smooths the bumps. Draw during slow periods, repay during strong ones. The flexibility matches the variability.
Unpredictable Needs
You don’t know exactly when you’ll need capital or how much. Opportunities and challenges appear without warning. Having a line in place means instant access without application delays.
Ongoing Working Capital
Your business regularly needs short-term capital infusions for inventory, payroll, or operational expenses. Rather than applying for new loans repeatedly, a line of credit provides continuous access.
Emergency Preparedness
Many business owners establish a business line of credit before they need it, treating it like a financial safety net. The credit sits unused until an emergency hits, then provides immediate funding.
Multiple Small Needs
If you anticipate several smaller funding needs over time rather than one large need, a line of credit makes more sense than multiple loan applications.
When to Choose a Term Loan
Term loans work better in other situations.
Specific Purchase
You’re buying equipment, funding a renovation, or making another defined investment. You know exactly what you need. A lump sum matches the need.
Predictable Repayment
You prefer knowing exactly what you owe each month. Fixed payments make budgeting straightforward. No variability to manage.
Larger Amounts
Very large funding needs often work better as term loans, especially when tied to assets or major investments.
Defined Timeline
Your use of funds has a clear timeline. Buy inventory in September, sell by January, loan repaid by March. The defined structure matches the defined purpose.
Building Credit
Term loans with consistent on-time payments can build your business credit profile, potentially qualifying you for better terms on future financing.
Comparing Costs
Cost comparisons between lines of credit and term loans aren’t straightforward because usage patterns vary.
Line of Credit Costs
Interest accrues only on what you draw. If you draw sparingly, total costs stay low even if the interest rate is higher. Some lines have annual fees or maintenance charges regardless of usage.
Term Loan Costs
Interest is calculated on the full amount for the full term. You know total cost upfront. No surprises, but also no savings if you don’t need the full amount.
The Real Comparison
A $50,000 line of credit where you only use $20,000 might cost less than a $50,000 term loan even if the line has a higher rate. You’re paying interest on $20,000 versus $50,000.
Conversely, if you’ll definitely use the full amount, a term loan’s potentially lower rate might make it cheaper overall.
Calculate based on realistic usage, not just headline rates.
Can You Have Both?
Absolutely. Many businesses use both products for different purposes.
A term loan might fund a major equipment purchase while a line of credit handles ongoing working capital needs. The equipment loan has fixed payments on a defined schedule. The credit line flexes with operational demands.
This combination gives you structure where you need it and flexibility where that matters more.
Qualification Differences
Requirements for lines of credit and term loans are similar but not identical.
Both typically require six months or more in business, revenue minimums around $10,000 to $15,000 monthly, and credit scores that vary by lender (many alternative lenders work with scores as low as 500).
Lines of credit sometimes require slightly stronger profiles because lenders are committing to ongoing access rather than a single transaction. But the differences are modest with alternative lenders.
As we covered in same day business loans, both products can fund quickly through alternative lenders, often within 24 to 48 hours.
Making Your Decision
Ask yourself these questions.
Do I know exactly what I need and when?
Yes: Term loan. No: Line of credit.
Is this a one-time need or ongoing?
One-time: Term loan. Ongoing: Line of credit.
Do I prefer payment predictability or flexibility?
Predictability: Term loan. Flexibility: Line of credit.
Will I use the full amount?
Definitely: Term loan may cost less. Maybe not: Line of credit pays only for what you use.
Do I want access for future needs?
Yes: Line of credit stays available. Term loans close when repaid.
Frequently Asked Questions
Can I pay off a line of credit early?
Yes. Pay down balances anytime without penalty in most cases. The credit becomes available again.
Do lines of credit require collateral?
Many alternative lenders offer unsecured lines of credit based on revenue rather than assets.
Which funds faster?
Both can fund within 24 to 48 hours through fast business funding providers.
Which is better for bad credit?
Both are available with credit scores as low as 500 from alternative lenders. Revenue matters more than credit for either product.
Can I convert a term loan to a line of credit?
Not directly. But once your term loan is repaid, you could apply for a line of credit as separate financing.
