Business Line of Credit vs. Term Loan: How to Choose

The fundamental difference

A term loan is a one-time lump sum repaid in fixed installments. A line of credit is a reusable pool you draw from and repay as needed, paying interest only on the outstanding balance. The question to ask is simple: do I need money once, or do I need access to money repeatedly?

Choose a term loan when

• You have a specific, one-time investment: a build-out, acquisition, vehicle, or major equipment.
• You want a fixed payment you can budget for 1–5 years.
• You are refinancing expensive short-term debt into a single lower payment.
• You want the lowest possible rate and can wait 2–5 days to fund.

Choose a line of credit when

• Your need is recurring or unpredictable: payroll timing, inventory restocks, slow-paying customers.
• You want to pay only for what you use.
• You want a safety net available before an emergency occurs.
• You expect to need capital multiple times over the next 12–24 months.

Cost comparison

Term loans from online lenders start around 7.5% APR for strong borrowers and run to 30%+ for weaker profiles. Lines of credit start around 8% APR but may carry draw fees (1–3% per draw) or monthly maintenance fees. For a single large need, a term loan is almost always cheaper. For sporadic small draws, a line is cheaper because you are not paying interest on idle money.

Using both together

Many well-run businesses carry both: a term loan funding a specific growth project, and a line of credit as operating flexibility. Lenders view this favorably when payments are current, and the combination keeps your most expensive capital (the line) at a low balance most of the time.