Solo Biz Soft Editorial Team A term loan and a business line of credit solve different problems, even though both are forms of business borrowing. A term loan gives you a lump sum upfront that you repay on a fixed schedule. A line of credit gives you a pool of money you can draw from, repay, and draw from again, paying interest only on what you actually use.
How a term loan works
You borrow a fixed amount, get it all at once, and repay it in equal installments over an agreed term, often one to ten years depending on what it is financing. The rate can be fixed or variable. Because the lender knows exactly what the money is for and the full schedule up front, term loans tend to have more predictable payments, which makes budgeting around them straightforward — see the loan calculator to work out a payment for a specific amount, rate and term.
How a line of credit works
A line of credit sets a maximum limit, and you draw against it as needed, similar to a credit card. You only pay interest on the amount actually drawn, not the full limit, and once you repay a draw, that amount becomes available again. This makes it a better fit for irregular needs — covering payroll during a slow month, bridging the gap between an invoice going out and getting paid, or handling an unexpected repair — rather than for a single large purchase. Run the numbers on the business line of credit calculator to see payoff time and total interest for a given draw.
Which one actually fits your situation
| Situation | Better fit |
| Buying a specific piece of equipment | Term loan (or equipment financing) |
| Smoothing out seasonal revenue swings | Line of credit |
| One-time expansion or buildout | Term loan |
| Covering gaps between invoices and payment | Line of credit |
| You want the lowest possible predictable payment | Term loan |
Cost and approval differences
Rates on both vary enormously by lender type and your credit profile — traditional bank term loans often land roughly in the high single digits to low double digits, while online or alternative lenders for either product can run much higher. Lines of credit sometimes carry an annual or maintenance fee even when undrawn, which a term loan does not. Lenders generally want to see time in business, revenue history and acceptable personal or business credit for either product; a brand-new business with no track record may find a line of credit harder to get approved for than a smaller, asset-backed term loan.
Frequently asked questions
Can I have both a term loan and a line of credit?
Yes. Many businesses use a term loan for a planned purchase and keep a line of credit open separately as a safety net for cash flow gaps.
Which one is cheaper overall?
It depends on how you use it. A line of credit you barely draw can cost very little in interest; a term loan you need in full from day one is usually the more efficient way to borrow a known amount.
Does a line of credit hurt my credit utilization the same way a credit card does?
It can be reported similarly to a revolving account, so a heavily drawn line may affect utilization-based scoring factors much like a credit card would.
More free tools: Loan calculator · Business line of credit calculator · All free tools
This article is general information, not financial advice. Loan terms, rates and fees vary by lender — compare actual offers before deciding.