Business loan versus line of credit

What is the difference?

A term loan gives you the full amount at once and you repay it in equal installments until it is gone. Interest accrues on the whole balance from day one. A line of credit gives you a limit you can draw against, repay and draw again; you pay interest only on the amount outstanding, and the line stays open for a year or more.

Loans are usually larger and longer. Lines are usually smaller, variable rate, and reviewed annually. Banks offer both to established businesses; online lenders offer both with looser criteria and higher rates. Both typically require a personal guarantee.

When is a term loan the better choice?

When you know the amount, the purpose and that you will need years to repay. Buying equipment, opening a second location, acquiring a business or refinancing expensive debt all fit a loan, because the asset or the savings last as long as the payments. A fixed payment also makes budgeting simple, and a fixed rate protects you if rates rise.

A loan is also the better choice when you want the longest term and lowest rate available, since SBA 7(a) loans and bank term loans run to ten years or more. The downside is that you pay interest on the whole amount whether or not you have used it yet.

When is a line of credit the better choice?

When the need is recurring and short. If you regularly wait 45 days to be paid while payroll is due every two weeks, a line covers the gap each cycle and costs you interest only for those weeks. Seasonal businesses use a line to buy inventory before the season and repay it from sales.

The downsides are variable rates, annual renewals that can be cut back if your numbers weaken, and the temptation to treat a line as permanent money. A line that stays fully drawn for a year should probably have been a loan. Cash flow gap financing covers the typical uses.

What do they cost side by side?

Say you need up to $100,000. A $100,000 term loan at 12% over three years costs about $3,321 a month, and about $19,572 in interest over the term. You pay that whether you use all the money in month one or let half of it sit.

A $100,000 line of credit at 14% costs nothing while undrawn, apart from any annual fee. If you draw $40,000 for four months and repay it, the interest is about $1,867. Draw that same $40,000 three times a year and you pay about $5,600 a year, still far less than the loan, because you only pay for the weeks you use.

Can you use both?

Yes, and many established businesses do: a term loan for the planned purchase and a line for day to day timing. Lenders generally allow it as long as your cash flow covers both payments and the collateral does not overlap in a way the first lender objects to. If one lender holds a blanket UCC lien, the second lender will usually ask it to subordinate or carve out the collateral it needs.

The order matters. Getting the line first, while your bank statements are clean and you do not urgently need it, is easier than applying for one during a crunch.

How do you apply?

Apply once here and your application is matched to lenders offering both products, so you can compare a term loan offer with a line of credit offer side by side before you decide. It is free for your business; lenders pay us when a loan funds. Have three to six months of bank statements ready, and for larger amounts, two years of tax returns and current financial statements; the document checklist has the full list.

If you prefer, ask your AI assistant to prepare and submit the application for you through our MCP server; it can lay out the loan and line offers on the same five lines. See the agents hub.