Business Line of Credit vs Term Loan
Both products provide capital, but they work very differently. Here is how to decide which is the right fit for your business and your specific need.
Side-by-side comparison
| Feature | Line of Credit | Term Loan |
|---|---|---|
| Structure | Revolving (draw, repay, draw again) | Lump sum, paid back in fixed instalments |
| Interest | Only on amount drawn | On full loan amount from day one |
| Best for | Recurring, unpredictable needs | One-time, defined purchases |
| Repayment flexibility | High (draw any amount, any time) | Low (fixed schedule) |
| Typical APR | 7% to 36% | 6% to 99% (varies widely) |
| Typical term | Ongoing (annual renewal) | 1 to 10 years |
| Approval speed | 1 to 3 days (online lenders) | 1 to 30 days |
| Amounts available | $1,000 to $500,000 | $5,000 to $5,000,000+ |
| Collateral | Often unsecured | Often required above $150k |
| Credit score impact | One-time inquiry at opening | One-time inquiry per loan |
| Fees | Draw fees, maintenance fees | Origination fee (1% to 5%) |
Which product fits your situation?
Use a line of credit when...
- +Cash flow is seasonal or unpredictable (retail, hospitality, agriculture)
- +You need a buffer for payroll or supplier invoices
- +You are not sure exactly how much you will need or when
- +You expect to borrow, repay, and borrow again multiple times per year
- +You want flexibility without committing to a fixed repayment schedule
Use a term loan when...
- +You are buying a specific asset (equipment, vehicle, real estate)
- +You have a one-time project with a defined cost (renovation, expansion)
- +You want predictable fixed monthly payments for budgeting
- +You need more than $250,000 and have collateral to pledge
- +You plan to borrow once and repay over several years
Example cost comparison: $50,000 over 12 months
Line of Credit
You draw $50,000 at 15% APR. You repay $25,000 after 6 months, reducing the balance. You only pay interest on the outstanding balance each month.
- Interest on $50k for 6 months: $3,750
- Interest on $25k for 6 months: $1,875
- Total interest: $5,625
Term Loan
You borrow $50,000 at 15% APR over 12 months with fixed monthly payments. Interest accrues on the declining balance each month.
- Monthly payment: $4,514
- Total paid: $54,168
- Total interest: $4,168
In this example, the term loan costs less because interest accrues on a declining balance. However, a line of credit gives you the option to draw again once repaid, without a new application. Use our calculator on the home page to model your scenario.
Can you have both at the same time?
Yes. Many businesses carry both a term loan (for a specific asset or project) and a line of credit (for ongoing working capital). Lenders will assess the existing debt load when considering a new application, but holding both products simultaneously is common and often optimal.