Business Line of Credit vs Term Loan: Which Is Right for Your Business?

The Core Difference: How You Access and Use the Money

A term loan gives you one lump sum upfront, which you repay with regular installments over a fixed period. A line of credit gives you access to a maximum amount of capital that you can draw from, repay, and draw again — like a credit card, but for business. This structural difference makes each product ideal for very different purposes.

When a Term Loan Makes More Sense

Choose a term loan when you have a specific, one-time capital need with a defined cost. Buying a piece of equipment for $75,000, funding a specific marketing campaign, completing a construction project, or making a strategic acquisition — these are all situations where a lump-sum term loan is the right structure. You know exactly what you need, you use it, and you repay it over time at a fixed rate.

Term loans also typically offer lower interest rates than lines of credit at equivalent loan amounts because the lender has certainty about the full outstanding balance. If you\'re comparing a 2-year term loan to a revolving line of credit at the same interest rate, the term loan is actually cheaper in total interest cost if you use the full amount, because the balance declines steadily with each payment.

When a Line of Credit Makes More Sense

Choose a line of credit when your capital need is recurring, variable, or unpredictable. Managing payroll gaps, bridging the time between service delivery and invoice payment, buying seasonal inventory, or handling unexpected cash flow shortfalls — these are all line of credit use cases. You only pay interest on what you actually use, and you can pay it down and use it again as needed.

A line of credit is particularly powerful for businesses with seasonal revenue patterns. A landscaping company might draw heavily from their line in spring to cover labor and materials before revenue peaks in summer, then repay and have capacity available again for the following spring. This pattern would be expensive and inefficient with repeated term loans.

Rate and Cost Comparison

Lines of credit typically carry higher interest rates than term loans for the same borrower profile — the flexibility comes at a cost. Bank lines of credit for established businesses run 7-15% APR. Online/fintech lines of credit run 15-35% APR. Term loans from the same lenders run 5-12% for banks and 12-30% for online lenders. However, because you only pay interest on outstanding balances with a line of credit, your effective cost depends entirely on how much you borrow and for how long.

Qualification Requirements Comparison

Lines of credit from banks typically require 2+ years in business, $250,000+ annual revenue, and 650+ credit score. Online lines of credit are more accessible — many approve businesses with 6+ months in business, $10,000+ monthly revenue, and 580+ credit score. Term loan requirements vary similarly by lender type. Neither product is universally easier to qualify for than the other.

Can You Have Both?

Yes — and many established businesses do. A term loan for a specific capital project alongside a revolving line of credit for ongoing working capital management is a very common and sensible structure. The key is to ensure your total debt service (combined monthly payments across all obligations) doesn\'t exceed what your cash flow can comfortably support.

Approvd helps you compare both lines of credit and term loans from multiple lenders. Explore lines of credit and term loans side by side with no impact to your credit score.