Quick Answer: A business line of credit gives you flexible access to funds up to $500,000 with variable rates averaging 7-8% and you only pay interest on what you draw, while business term loans provide lump-sum funding from $10,000 to $5 million with fixed rates around 6.7-11.5% paid back in predictable monthly installments.
Choosing between a line of credit and a term loan affects how much you pay monthly, your total interest costs, and your financial flexibility. You’re comparing revolving credit that works like a business credit card against a traditional installment loan that gives you all the money upfront.
The numbers make the difference clear. Borrowing $50,000 through a line of credit at 8% APR means you only pay interest on the $10,000 you actually use—about $800 annually. The same $50,000 term loan at 9% costs you $4,500 in interest yearly on the full amount, whether you need it all immediately or not.
Quick Facts: Line of Credit vs Term Loan
| Feature | Business Line of Credit | Business Term Loan |
|---|---|---|
| Funding Amount | $5,000-$500,000 (up to $10M for some lenders) | $10,000-$5 million |
| Interest Rate Range | 7-60% APR (average 7-8% for qualified borrowers) | 6.7-11.5% APR at banks |
| Rate Type | Usually variable | Usually fixed |
| How Funds Disbursed | Draw as needed up to limit | Full lump sum upfront |
| Interest Charged On | Only the amount you draw | Entire loan amount |
| Repayment Structure | Variable (based on balance) | Fixed monthly payments |
| Typical Term Length | 6-24 months (renews annually) | 1-10 years (25 years for real estate) |
| Best For | Working capital, cash flow gaps | Equipment, real estate, one-time purchases |
| Collateral Required | Often unsecured | Usually secured for larger amounts |
| Approval Speed | 1-7 days | 1-4 weeks |
Understanding Business Lines of Credit—Flexible Access to Capital
A business line of credit functions like a credit card for your company—you get approved for a maximum credit limit but only borrow what you actually need when you need it.
Your lender approves you for a specific credit limit based on your revenue, credit scores, and business financials. You can draw $5,000 this month, $15,000 next month, or nothing at all. Interest accumulates only on your outstanding balance, not your available credit.
Current rates for qualified businesses range from 7-8% APR at traditional banks. Online lenders charge 10-25% for businesses with lower credit scores or shorter operating histories. Alternative lenders serving startups or bad credit businesses may charge 30-60% APR.
Repayment works on a revolving basis—as you pay down your balance, that credit becomes available again. If you have a $100,000 limit and draw $40,000, you have $60,000 remaining. Pay back $20,000 and your available credit jumps to $80,000.
Types of Business Lines of Credit
Unsecured lines require no collateral but demand stronger credit scores (typically 680+) and established business history (2+ years). Limits usually cap at $250,000 for unsecured options.
Secured lines use your business assets—accounts receivable, equipment, inventory, or real estate—as collateral. Securing your line typically reduces rates by 2-4% and increases available credit limits to $500,000-$10 million.
Invoice financing lines specifically use your outstanding invoices as collateral. You can typically access 80-90% of invoice value immediately rather than waiting 30-90 days for customer payment.
Exploring Business Term Loans—Predictable Lump-Sum Financing
Term loans provide all your borrowed funds upfront in one lump sum that you repay with interest through fixed monthly installments over a predetermined period.
Your lender evaluates your application, approves a specific loan amount, and deposits the full sum into your account. From day one, interest accrues on the entire principal regardless of whether you’ve spent it yet.
Interest rates at traditional banks currently range from 6.7-11.5% APR depending on your creditworthiness and loan term. SBA-backed term loans offer some of the lowest rates at 9.5-11% for most borrowers. Online lenders charge 10-30% APR with faster approval but higher costs.
The repayment schedule stays fixed throughout your loan term. A $100,000 loan at 8% interest over 5 years costs $2,027 monthly with $21,620 in total interest. Your payment never changes, making budgeting straightforward.
Term Loan Length Options
Short-term business loans last 3-18 months and carry higher monthly payments but lower total interest costs. Approval comes fast—often within days—making them ideal for urgent equipment repairs or seasonal inventory needs.
Medium-term loans stretch 1-5 years and balance monthly payment affordability with reasonable interest costs. Most working capital and equipment loans fall in this range.
Long-term loans extend 5-25 years for major purchases like commercial real estate or expensive manufacturing equipment. Lower monthly payments make large acquisitions affordable, but you pay significantly more interest over time.
Interest Rate Comparison—The Real Cost Difference
| Loan Amount | Line of Credit (8% APR, $30K drawn) | Term Loan (9% APR, full amount) | Annual Interest Difference |
|---|---|---|---|
| $50,000 | $2,400 (on $30K balance) | $4,500 | Save $2,100 with LOC |
| $100,000 | $2,400 (on $30K balance) | $9,000 | Save $6,600 with LOC |
| $250,000 | $2,400 (on $30K balance) | $22,500 | Save $20,100 with LOC |
The line of credit advantage becomes obvious when you don’t need the full credit limit immediately. You’re only paying interest on actual draws, not unused available credit.
However, term loans typically offer lower base rates for comparable credit profiles. If you need the full loan amount immediately for a specific purchase, the term loan’s lower rate might cost less despite charging interest on the complete balance.
Variable vs Fixed Rate Impact
Your line of credit usually carries variable rates tied to prime rate or SOFR (Secured Overnight Financing Rate). When the Federal Reserve raises rates, your borrowing costs increase proportionally. A prime rate jump from 7.5% to 8.5% means your line of credit rate (typically prime plus 1-2.5%) rises from 9% to 10%.
Term loan fixed rates protect you from market fluctuations. You lock in your rate at closing and pay that exact rate regardless of what happens to broader interest rates over your loan term.
This predictability costs you—fixed rates usually run 0.5-1.5% higher than initial variable rates. You’re paying a premium for payment certainty and protection against rising rates.
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How Each Financing Option Handles Repayment
Your line of credit billing works similarly to credit card payments. You receive monthly statements showing your outstanding balance, minimum payment due, and interest charges. Minimum payments typically equal 1-3% of your outstanding balance plus accrued interest.
You can pay down your entire balance at any time without prepayment penalties. Many businesses pay off their lines completely each quarter when revenue peaks, then draw again when cash flow tightens.
Some lenders require you to bring your balance to zero annually—called a “clean-up period.” This 30-60 day zero-balance requirement prevents businesses from treating revolving credit as permanent debt.
Term Loan Payment Structure
Your term loan payments remain identical each month throughout the entire loan term. A $200,000 loan at 8% for 7 years costs $3,163 monthly for 84 consecutive months.
Early payments go primarily toward interest rather than principal. In month one of that $200,000 loan, about $1,333 pays interest while only $1,830 reduces principal. By month 84, nearly the entire $3,163 payment attacks principal.
Prepayment penalties might apply if you pay off the loan early. Many lenders charge 1-5% of the remaining balance as an early payoff fee for terms exceeding 3-5 years. Always verify prepayment terms before signing.
Best Use Cases for Business Lines of Credit
You need a line of credit when cash flow fluctuates seasonally or unpredictably. Retail businesses use lines to stock inventory before holiday seasons, then pay down balances after peak sales periods end.
Service businesses use lines to cover payroll during slow months when client payments lag. Your line ensures employees get paid on time even when cash collections slow temporarily.
Unexpected expenses become manageable with credit line access. Equipment breakdowns, emergency repairs, or sudden opportunities requiring quick capital decisions all benefit from immediate fund availability.
Working Capital Management
Your accounts receivable often sit outstanding for 30-90 days while you still need to pay suppliers, rent, and employees immediately. A line of credit bridges these timing gaps without depleting your cash reserves.
Growth spurts strain cash flow even when business is booming. Hiring new employees, expanding inventory, or taking on larger projects require upfront capital before revenue arrives. Lines of credit smooth these growth transitions.
Marketing campaigns and seasonal promotions need funding before generating returns. Rather than letting opportunities pass, you can invest in growth initiatives and repay the line when increased revenue materializes.
When Business Term Loans Make More Sense
You should choose term loans for specific, one-time purchases where you know exactly how much you need and when you need it.
Equipment purchases work perfectly with term loans. Buying a delivery truck, manufacturing machinery, restaurant kitchen equipment, or medical devices requires lump-sum payments. Term loans provide that capital with fixed payments you can budget around.
Commercial real estate acquisitions demand substantial upfront capital. Down payments, closing costs, and property purchases require hundreds of thousands or millions immediately—scenarios where revolving credit limits fall short.
Debt consolidation becomes affordable through term loans. If you’re paying 15-25% on multiple short-term debts, consolidating into one 9% term loan saves thousands monthly while simplifying finances.
Business Expansion Projects
Opening new locations requires significant upfront investment in leasehold improvements, inventory, equipment, and working capital. Term loans fund these predictable costs with repayment terms matching your expansion ROI timeline.
Major renovations transforming your facility need lump-sum funding. Whether upgrading your restaurant, expanding manufacturing capacity, or modernizing office space, term loans provide capital for projects with defined scopes and costs.
Business acquisitions require immediate payment to sellers. Term loans structured over 5-10 years let you purchase competitors, franchises, or complementary businesses while keeping monthly payments manageable.
Qualification Requirements and Approval Process
Both financing types examine similar qualification factors but weigh them differently based on their risk profiles.
Credit score requirements for lines of credit typically start at 600-650 with online lenders, rising to 680-720 at traditional banks. Term loans demand slightly higher minimums—650-680 for online lenders, 700+ at major banks.
Time in business matters significantly. Lines of credit might approve businesses operating 6-12 months, though 2+ years provides better rates. Term loans typically require 2-3 years of operating history for approval at competitive rates.
Annual revenue minimums vary by lender and loan size. Lines of credit often require $100,000-$250,000 in annual sales. Term loans for substantial amounts ($250,000+) want $500,000-$1 million in annual revenue.
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Documentation Requirements
You’ll submit business tax returns for the past 2-3 years, recent bank statements (3-6 months), profit and loss statements, balance sheets, and business licenses or registration documents.
Personal financial statements become necessary for businesses under 5 years old or loans over $250,000. Lenders want to see owner investment in the business and personal assets available as secondary repayment sources.
Business plans with financial projections help approval chances, especially for younger companies. Detailed revenue projections, expense budgets, and growth strategies demonstrate your ability to repay borrowed funds.
Collateral documentation varies by loan type and security requirements. Secured financing needs equipment lists with values, property appraisals, accounts receivable aging reports, or inventory valuations.
Fees Beyond Interest Rates
Your line of credit might include an origination fee of 0.5-2% of the credit limit when you first establish the line. A $100,000 line at 1.5% costs $1,500 upfront, though some lenders waive origination fees.
Annual maintenance fees keep your line open whether you use it or not. These typically run $50-500 annually depending on your credit limit size. Some lenders charge monthly maintenance fees of $10-50 instead.
Draw fees charge you each time you access funds, usually 0.25-1% per withdrawal. Taking $10,000 at 0.5% costs $50 in draw fees. This encourages fewer, larger draws rather than many small withdrawals.
Term Loan Fee Structure
Origination fees for term loans typically run 1-5% of the loan amount. A $150,000 loan at 2% origination costs $3,000 deducted from your proceeds—you receive $147,000 even though you repay $150,000 plus interest.
Application fees of $50-500 might apply, particularly for SBA loans or larger financing amounts. These fees cover credit report pulls, initial underwriting, and processing costs.
Late payment penalties vary but commonly equal 3-5% of your missed payment. Missing a $3,000 payment at 5% penalty adds $150 to your next bill. Multiple late payments can trigger default clauses and loan acceleration.
Prepayment penalties protect lenders from lost interest if you pay off loans early. These typically apply only to loans over $100,000 with terms exceeding 5 years, charging 1-3% of remaining principal for early payoff.
Flexibility Differences That Affect Your Business
Line of credit flexibility lets you adapt to changing circumstances. Draw $20,000 for inventory this month, pay it off, then draw $40,000 next quarter for equipment—your revolving access accommodates varying needs.
You control when and how much you borrow. Unlike term loans forcing you to take the full amount immediately, lines let you start small and increase borrowing as needs develop.
Underutilized credit doesn’t cost much beyond maintenance fees. Having $100,000 available but only using $15,000 means you pay interest solely on that $15,000, not the full limit.
Term Loan Constraints
Your term loan deposits the entire amount immediately whether you need it all now or not. Taking $200,000 to buy equipment in 3 months means you’re paying interest on funds sitting idle in your account.
You cannot re-borrow repaid principal. Once you’ve paid down $50,000 of your $200,000 loan, that $50,000 isn’t available again. Needing additional capital later requires applying for new financing.
Changing circumstances can’t adjust your payment obligations. Experiencing a slow quarter doesn’t reduce your $3,000 monthly payment—you owe the same fixed amount regardless of revenue fluctuations.
Impact on Your Business Credit Profile
Opening a business line of credit establishes revolving credit history similar to credit cards. Maintaining low utilization (under 30% of your limit) and making payments on time improves your business credit scores.
High utilization hurts your credit even when payments are current. Drawing $90,000 on a $100,000 line (90% utilization) signals financial stress to credit bureaus, potentially lowering your scores by 20-40 points.
Multiple hard inquiries from applying to numerous lenders can temporarily drop your scores 5-10 points each. Concentrate applications within 14-30 days so multiple inquiries count as a single shopping event.
How Term Loans Affect Credit
Your term loan appears as installment debt on credit reports. Regular on-time payments build positive payment history, typically improving business credit scores by 20-50 points over 12-24 months.
Debt-to-income ratios get monitored by credit bureaus. Carrying $300,000 in term debt against $1 million annual revenue shows 30% debt ratio—generally considered manageable. Exceeding 50% debt ratio signals over-leverage.
Loan payoff removes the account from active tradelines after reporting closed status. While the positive payment history remains for years, you lose the benefit of an active account demonstrating current creditworthiness.
Combining Both Financing Types Strategically
Many businesses use both products simultaneously for different purposes, matching each financing type to appropriate uses.
Use term loans for predictable, long-term needs like real estate, major equipment, or business acquisitions. Lock in fixed rates and payments you can reliably budget around for 5-10 years.
Maintain a business line of credit for working capital, cash flow management, and unexpected opportunities or expenses. Your line provides flexibility term loans can’t match.
This dual approach costs more in fees and interest charges but provides comprehensive financial flexibility. You’re prepared for both planned investments and unexpected situations.
Real-World Combination Example
A manufacturing company takes a $500,000 term loan at 8% to purchase production equipment, creating fixed monthly payments of $6,067 for 10 years. They also maintain a $150,000 line of credit for inventory purchases and seasonal cash flow management.
When a major order arrives requiring immediate raw material purchases, they draw $80,000 from their line to fill the order. The equipment term loan handles predictable long-term debt while the line covers variable short-term needs.
After collecting payment from that large order, they pay down the $80,000 line balance completely, avoiding 2-3 months of unnecessary interest charges. The term loan continues on its fixed schedule regardless.
Renewal and Extension Considerations
Your line of credit typically requires annual renewal. Lenders review your financial performance, credit scores, and payment history to decide whether continuing the line makes sense.
Renewal might come with adjusted terms—higher or lower credit limits, different interest rates, or modified fees based on your current financial strength. Strong performance often earns you increased limits and better rates.
Some lenders close non-performing lines where you’ve never drawn funds or consistently miss payments. Use your line periodically (even small draws) to maintain the relationship and demonstrate responsible credit management.
Term Loan Refinancing Options
You can refinance term loans when rates drop or your credit improves significantly. Refinancing a $300,000 loan from 11% to 8% saves roughly $9,000 annually—potentially worth paying refinancing fees of $3,000-$6,000.
Extending loan terms reduces monthly payments but increases total interest paid. Refinancing a $200,000 balance with 5 years remaining into a new 10-year term might cut monthly payments by $1,500 but cost $30,000-$50,000 more in total interest.
Business performance changes might qualify you for better terms. Doubling revenue, improving credit scores by 50+ points, or paying down other debts strengthens your refinancing position for rate reductions.
Alternative Lender Options and Marketplace Lending
Online lenders approve financing faster than traditional banks but typically charge higher rates—12-30% APR for lines of credit, 10-25% for term loans.
You get approvals within 1-3 business days versus 2-4 weeks at banks. Funding often arrives the same day as approval, making online lenders valuable for urgent needs.
Credit requirements relax significantly. Many online lenders approve credit scores from 600-650, time in business as short as 6-12 months, and annual revenue under $100,000.
When Alternative Lenders Make Sense
Your bank denied your application due to limited operating history, lower credit scores, or insufficient collateral. Alternative lenders fill this gap by accepting higher risk in exchange for higher rates.
Speed matters more than cost. Needing funds within 48 hours for emergency equipment repair, urgent inventory opportunity, or immediate cash flow crisis justifies paying 18-25% APR temporarily.
You’re building credit history for future traditional financing. Successfully repaying an alternative loan improves your credit profile, potentially qualifying you for better bank terms in 1-2 years.
Common Mistakes Businesses Make When Choosing
Using lines of credit for long-term purchases creates expensive revolving debt. Financing equipment or renovations through a line at 12% variable rates costs much more than a 7-year term loan at 9% fixed.
Your monthly line of credit interest changes unpredictably, making budgeting difficult. That $10,000 equipment purchase through your line might cost $1,200 annually if you maintain the balance, versus $900 with a fixed term loan.
Taking term loans for short-term needs locks you into payments you might not need. Borrowing $100,000 for inventory with a 7-year repayment term means you’re still making payments long after selling that inventory.
Matching Financing to Asset Life
Your financing term should match the useful life of what you’re purchasing. Equipment lasting 5 years should use a 5-year term loan. Inventory turning over in 3 months should use a line of credit.
This matching principle prevents paying for assets after they’ve stopped generating revenue. Financing a delivery truck over 7 years when it only lasts 5 years means you’re making payments on a worthless vehicle in years 6-7.
Conversely, using short-term financing for long-term assets creates payment pressure. Buying real estate with a 2-year line of credit means you must refinance or fully repay within 24 months—potentially during unfavorable market conditions.
Tax Implications and Deductibility
Interest paid on both lines of credit and term loans typically qualifies as deductible business expenses, reducing your taxable income.
You deduct interest in the year you pay it, not when it accrues. If your December line of credit interest gets paid in January, you deduct it on next year’s tax return.
Origination fees and other loan costs might be deductible or require amortization over the loan term depending on the specific fee type and loan purpose. Consult your tax advisor about proper treatment.
Points and Fee Treatment
Loan origination fees paid to secure business financing typically must be amortized (deducted gradually) over the loan term rather than deducted immediately as a lump sum.
A $3,000 origination fee on a 5-year loan means you deduct $600 annually (1/5 of total) for 5 consecutive years. If you pay off the loan early, you can deduct the remaining unamortized amount in that payoff year.
Late fees, draw fees, and maintenance fees usually qualify as immediately deductible expenses in the year incurred since they represent ongoing costs rather than costs to obtain financing.
Making Your Decision: Line of Credit or Term Loan
Choose a business line of credit when you need flexible access to working capital, face variable or seasonal cash flow, can’t predict exact funding needs or timing, want to pay interest only on funds actually used, or need quick access to emergency capital.
Select a business term loan when making specific one-time purchases, buying equipment or real estate, prefer predictable fixed monthly payments, want lower interest rates for large amounts, or need financing exceeding typical line of credit limits.
Consider your cash flow patterns carefully. Businesses with steady, predictable revenue handle term loan fixed payments easily. Companies facing seasonal fluctuations or variable income need line of credit flexibility to match obligations with available cash.
Frequently Asked Questions
Can I Have Both a Line of Credit and a Term Loan Simultaneously?
Yes, many businesses maintain both financing types for different purposes. You might use a term loan for equipment or real estate with predictable monthly payments, while keeping a line of credit for working capital and cash flow management. Lenders evaluate your total debt burden across all financing, but having both products doesn’t prevent approval if your revenue and cash flow support the combined obligations. In fact, demonstrating responsible use of multiple financing types often improves your creditworthiness.
How Quickly Can I Access Funds From Each Option?
Lines of credit provide immediate or same-day access once established—you simply draw funds as needed up to your limit. Initial line approval takes 1-7 days with online lenders, 1-3 weeks at traditional banks. Term loan funding arrives within 1-3 days after final approval, but the approval process takes 1-4 weeks depending on loan complexity and lender type. Online lenders approve term loans faster (3-7 days) than traditional banks (2-4 weeks) but often charge higher rates.
What Happens If I Can’t Make My Payment?
Missing a line of credit payment triggers late fees (typically 3-5% of payment due), potentially raises your interest rate by 2-5%, and damages your business credit scores by 30-80 points. Your lender might reduce your credit limit or freeze new draws until you catch up. For term loans, late payments incur similar fees and credit damage, with 90+ days past due potentially triggering loan acceleration where the lender demands full immediate repayment. Multiple missed payments on either product can result in default, collections, and potential legal action.
Can I Convert My Line of Credit to a Term Loan?
Many lenders offer “term out” options that convert your outstanding line of credit balance into a fixed-payment term loan. This makes sense when you’ve maintained a high balance for an extended period and want payment predictability. The new term loan typically carries similar or slightly lower interest rates since it becomes installment debt rather than revolving credit. Some lenders automatically suggest terming out when your utilization stays high for 6-12 consecutive months, viewing it as long-term debt rather than temporary working capital.
Do I Need Collateral for Either Financing Type?
Collateral requirements vary by lender and loan amount. Unsecured lines of credit up to $250,000 often require no collateral if you have strong credit (700+) and established business history (2+ years). Larger lines and amounts over $250,000 typically require business assets as collateral. Term loans frequently require collateral for amounts over $100,000, using purchased equipment, real estate, or other business assets to secure the debt. Stronger credit profiles and longer business histories sometimes qualify for unsecured term loans up to $250,000-$500,000, though rates will be 2-4% higher than secured loans.
Final Thoughts
Business lines of credit and term loans both provide valuable financing but serve completely different purposes in your business financial strategy. Lines of credit excel at managing cash flow, covering seasonal needs, and providing flexible working capital access with interest charged only on drawn funds.
Term loans deliver lump-sum financing for specific purchases at typically lower fixed rates with predictable monthly payments. Equipment, real estate, business acquisitions, and major one-time expenses fit perfectly with term loan structures.
Your business likely benefits from having both financing types available. Use term loans for planned, predictable investments requiring substantial capital. Maintain a line of credit for unexpected opportunities, emergency repairs, and working capital management.
Match your financing choice to your specific need. Lines of credit for short-term, variable, or unpredictable needs. Term loans for long-term, fixed, or specific purchases. This strategic approach minimizes your borrowing costs while maintaining financial flexibility for growth opportunities.
