Business Line of Credit vs. Term Loan: Which Is Right for You?
Both a line of credit and a term loan can fund your business, but they work very differently. A term loan gives you a lump sum repaid on a fixed schedule. A line of credit lets you borrow as needed up to a limit. Here is how to decide.
Side-by-side comparison
| Business line of credit | Term loan | |
|---|---|---|
| How you receive funds | Draw as needed up to a limit | Lump sum upfront |
| Repayment | Pay on what you draw; availability may renew as you repay | Fixed payments over a set term |
| Interest | Generally on the amount drawn | On the full balance |
| Best for | Ongoing or uncertain needs, cash flow gaps | One-time, defined investments |
| Typical fees | Draw, maintenance or annual fees possible | Origination fees possible |
| Predictability | Variable rates are common | Fixed rates are common |
| Typical amounts | Usually smaller or moderate | Often larger |
A simple example (hypothetical)
These numbers are for illustration only and are not offers. Real terms vary.
Line of credit: You have a $50,000 limit and draw $10,000 for three months at a hypothetical 12% annual rate. Interest is roughly $300 for that period, plus any fees.
Term loan: You borrow $50,000 over 36 months at a hypothetical 12% annual rate. Monthly payments would be about $1,660, with total interest of about $9,800.
The term loan costs more in total, but it funds a larger purchase. The line is cheaper if you only need a small, short-term amount.
Choose a line of credit when…
- Your needs are recurring or unpredictable, such as seasonal inventory or payroll timing.
- You want to pay interest only on what you use.
- You expect to repay quickly and borrow again.
Choose a term loan when…
- You have a specific, one-time expense such as equipment, renovation or acquisition.
- You want predictable payments and a fixed end date.
- You need a larger amount than most lines provide.
Can you use both?
Yes. Many businesses use a term loan for major investments and a line of credit as a cash-flow buffer. Make sure combined payments fit your cash flow.
Explore: business lines of credit · small business loans · business loans guide
Questions to ask any lender
- What is the APR and total repayment amount?
- What fees apply, and when?
- Is the rate fixed or variable?
- Is there collateral or a personal guarantee?
- Are there prepayment penalties?
- Can the lender reduce or freeze my limit?
Frequently asked questions
Which is cheaper?
It depends on how much you borrow and for how long. A line can be cheaper for small, short-term needs. A term loan may offer a lower rate for large amounts. Compare APR and total cost.
Is it easier to get a line of credit or a term loan?
Requirements vary by lender and product. Both generally consider credit, revenue and time in business.
Do lines of credit expire?
Many have a set draw period and may be reviewed or renewed. Ask about terms.
Can a new business qualify?
Some lenders work with newer businesses, but options may be more limited.
Epic Capital Solutions is not a lender, bank or card issuer and does not make credit decisions. This guide is general information, not financial, legal or tax advice. Rates, fees and terms are set by providers and change often.