Term Loan vs Business Line of Credit: Complete Comparison
Term Loan
A lump-sum loan with fixed monthly payments over a set repayment period. Best for one-time investments with predictable costs.
Business Line of Credit
A revolving credit facility you draw from as needed, paying interest only on the amount used. Best for ongoing or unpredictable funding needs.
Side-by-Side Comparison
| Feature | Term Loan | Business Line of Credit |
|---|---|---|
| Interest Rates | 7%–30% | 8%–60% (draw-based) |
| Approval Speed | 1–14 days (online) | 1–7 days (online) |
| Term Length | 1–10 years fixed | Revolving (6–24 month draw periods) |
| Collateral Required | Often required for larger amounts | Usually unsecured under $250K |
| Minimum Credit Score | 600–680+ | 600–650+ |
| Minimum Revenue | $50K–$250K annual | $50K–$120K annual |
| Funding Time | 1–7 days | Same day to 3 days (after approval) |
| Flexibility | Low — fixed amount, fixed schedule | High — draw and repay as needed |
| Total Cost of Capital | Predictable — fixed interest on full amount | Variable — interest only on drawn amounts |
| Best Business Stage | Businesses with a specific capital need | Businesses with fluctuating cash flow |
Our Verdict
The choice comes down to how you need to use the capital. A term loan is ideal for a defined one-time expense — equipment, expansion, or a large purchase — where you know exactly how much you need. A line of credit shines when cash flow is variable and you need a financial safety net you can tap repeatedly. Many smart business owners maintain both.
Best For
Term Loan
Businesses making a specific investment — buying equipment, renovating a location, or financing a major project with a known cost.
Business Line of Credit
Businesses managing seasonal revenue swings, bridging gaps between invoices, or needing ongoing access to working capital without re-applying each time.
Frequently Asked Questions
Can I have both a term loan and a line of credit at the same time?
Absolutely, and many businesses do. A term loan covers a major purchase while a line of credit handles day-to-day cash flow management. Lenders evaluate each product independently, so having one does not disqualify you from the other.
Which is cheaper in total interest paid?
It depends on usage. If you need the full amount for the entire term, a term loan is typically cheaper due to lower interest rates. But if you only need periodic access to smaller amounts, a line of credit can cost less because you only pay interest on what you draw.
Do lines of credit have annual fees?
Many do. Annual maintenance fees typically range from $0 to $500 depending on the lender. Some also charge draw fees or inactivity fees. Always factor these into the total cost when comparing against a term loan with no ongoing fees.
What happens when my line of credit draw period ends?
At the end of a draw period (typically 12–24 months), most lenders either renew automatically, require a review for renewal, or convert the balance to a term repayment. Check your agreement upfront so there are no surprises.
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