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

Two of the most common forms of business financing are term loans and lines of credit. Both provide capital, but they work very differently and are suited for different situations. Choosing the wrong one can cost you money or leave you without the flexibility you need.

This guide explains how each works, when to use each, and how to decide.

What Is a Business Term Loan?

A term loan provides a lump sum of money upfront, which you repay over a set period (the "term") through regular payments of principal and interest.

How it works:

• You borrow $100,000 at 8% over 5 years
• You receive $100,000 at closing
• You make fixed monthly payments of approximately $2,028
• After 60 months, the loan is fully paid off

Best for: One-time investments with a clear, specific use — like purchasing equipment, buying a vehicle, acquiring another business, or completing a real estate transaction.

What Is a Business Line of Credit?

A line of credit (LOC) is a revolving credit facility that works like a credit card — you have a maximum credit limit, draw what you need, pay it back, and draw again.

How it works:

• You're approved for a $100,000 line of credit at 9% variable rate
• In January, you draw $30,000 to cover payroll during a slow month
• In March, you pay it back
• In May, you draw $50,000 for a large inventory purchase
• You only pay interest on what you've drawn

Best for: Ongoing, variable working capital needs — managing cash flow gaps, covering seasonal fluctuations, handling unexpected expenses, and having capital available on demand.

Term Loan vs. Line of Credit: Side-by-Side Comparison

| Feature | Term Loan | Line of Credit | |---------|-----------|---------------| | Payout | Lump sum at closing | Draw as needed, up to limit | | Repayment | Fixed monthly payments | Variable; pay minimum or pay down | | Interest | On full loan balance | Only on outstanding draws | | Rate | Usually fixed | Usually variable | | Best use | One-time investment | Ongoing working capital | | Predictability | High — same payment every month | Lower — depends on draws | | Availability | Once (at closing) | Ongoing (revolving) | | Typical term | 1–25 years | 1 year, renewed annually |

When to Use a Term Loan

Choose a term loan when:

You're making a specific, one-time investment. Buying a piece of equipment, expanding your facility, or acquiring another business are classic term loan scenarios. You know exactly how much you need, and you don't need to keep borrowing.

You want payment predictability. Fixed monthly payments make cash flow planning easier. Many business owners prefer knowing exactly what they owe every month.

You want a fixed interest rate. Most term loans have fixed rates, protecting you if rates rise.

Your payback timeline matches the asset. Term loans match repayment to the useful life of the investment — a 5-year loan for a 5-year piece of equipment makes financial sense.

SBA loans: Most SBA loans are structured as term loans. SBA 7(a) term loans for working capital go up to 10 years; for real estate, up to 25 years.

When to Use a Line of Credit

Choose a line of credit when:

You have variable, ongoing cash flow needs. If your cash flow fluctuates — seasonal businesses, project-based businesses, businesses with long receivable cycles — a line of credit lets you draw when needed and pay down when cash is flush.

You want a safety net. Many business owners maintain a line of credit even when they don't need it, just for emergencies or unexpected opportunities.

You're managing receivables. If you invoice clients on net-30 or net-60 terms, a line of credit bridges the gap between when you deliver work and when you get paid.

You're not sure exactly how much you'll need. If you need "somewhere between $50,000 and $150,000 over the next year," a line of credit gives you flexibility that a term loan can't.

Interest Rate Differences

Term loans typically have fixed interest rates — your rate doesn't change over the life of the loan. This is predictable but can mean you're locked in to a higher rate if market rates fall.

Lines of credit typically have variable rates tied to the Prime Rate or SOFR. When rates rise, your line of credit cost increases. When rates fall, you benefit. Variable rates introduce uncertainty but are often lower initially.

For lines of credit:

• Bank LOC: Prime + 1–3% for established businesses
• SBA LOC: Prime + 2.75–4.75% (through SBA CAPLines program)
• Alternative lenders: Much higher rates (15–40%+ for newer businesses)

SBA Options for Both

The SBA offers both term loans and lines of credit:

Term Loans: SBA 7(a), SBA 504, SBA Microloan, SBA Community Advantage

Lines of Credit: SBA CAPLines program, which includes:

• Seasonal LOC — for businesses with seasonal cash flow
• Contract LOC — for businesses with specific contracts to fulfill
• Builder's LOC — for construction and building businesses
• Working Capital LOC — general working capital purposes

CAPLines are SBA-guaranteed, making them more accessible and lower-rate than conventional lines of credit.

The Cost of Each

Term loan: Pay interest on the full balance from day one, even if you don't need all the money immediately.

Line of credit: Pay interest only on what you draw. But LOCs often have an annual fee ($100–$500 for small bank LOCs, more for larger ones) and may have draw fees (0.1–0.5% per draw). Some have non-use fees if you don't draw enough.

Example: A $100,000 term loan at 8% over 5 years costs approximately $21,500 in total interest. A $100,000 LOC at 9% where you average a $30,000 balance over 5 years costs approximately $13,500 in interest — significantly less, but only if you manage it well.

Key Takeaways

• Use a term loan for one-time, specific investments with a clear use case
• Use a line of credit for ongoing, variable working capital needs
• Lines of credit charge interest only on what you draw — more flexible but variable rate
• Term loans offer payment predictability and fixed rates
• SBA CAPLines provide government-backed lines of credit for qualifying businesses

Frequently Asked Questions

Can I have both a term loan and a line of credit?

Yes — and many growing businesses do. A term loan for a specific investment (equipment, real estate) alongside a line of credit for working capital is a common and sensible combination.

Which is easier to get — a term loan or a line of credit?

Generally, term loans are slightly easier to get because they have specific collateral (the asset being purchased) and a clear repayment plan. Lines of credit are often unsecured or secured by business assets, making lenders more cautious. Strong business credit history helps significantly for LOCs.

What's the SBA CAPLines program?

CAPLines is the SBA's program for revolving lines of credit (working capital). It provides SBA-guaranteed lines of credit for four specific purposes: seasonal needs, specific contracts, construction, and general working capital. Maximum $5 million, terms up to 10 years.

Check Your Eligibility

Use our free eligibility checker to see which loan programs — including SBA term loans and CAPLines — your business qualifies for.

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• SBA Loan Eligibility Requirements 2025: Complete Guide
• SBA Loan vs Business Line of Credit: Pros & Cons 2025
• Bank Loan vs SBA Loan: Which Is Better?