A term loan gives your business a one-time lump sum repaid on a fixed schedule, while a business line of credit gives you revolving access to funds you can draw, repay, and reuse up to a credit limit. Choosing between them comes down to a single question: do you need money for one planned investment, or ongoing access to capital for short-term needs?

Term loan vs. line of credit at a glance.

Attribute Business term loan Business line of credit
Primary use of funds One-time, planned investments (equipment, real estate, expansion) Ongoing or unpredictable expenses (working capital, payroll, inventory)
Flexibility of use Lump sum at closing; spent towards the stated purpose Draw what you need, when you need it up to the credit limit
Asset/ financing type Installment debt Revolving credit
Repayment structure Fixed monthly payments over a set term Payments based on the amount drawn; weekly or monthly
Interest rate structure Often fixed Often variable
Term length Typically 1 to 10+ years Revolving; reset as you repay
Process/ complexity Larger amounts, more documentation, longer underwriting Faster funding once approved; reusable without reapplying

This table is a starting point. Exact terms vary by lender, and your specific offer will depend on your business profile.

What is a business term loan?

A term loan is a one-time, lump-sum loan. You borrow a fixed amount, receive all the funds at closing, and repay it over a set period of time on a fixed repayment schedule. Both the interest rate and the monthly payment are typically fixed, which makes a term loan predictable from day one.

For example, your business may borrow $100,000 at an 8% fixed rate over five years. Your monthly payment stays the same until the loan is paid in full.

Key features of a term loan:

  • A single lump sum disbursed at closing
  • A fixed interest rate and fixed monthly payment in most cases
  • Term length tied to the asset or purpose being financed
  • Often secured by collateral and a personal guarantee

That predictability is part of the appeal. Knowing exactly how much you'll owe each month makes budgeting easier, especially when you're using the loan for an investment that's expected to generate revenue over time.

What is a business line of credit?

A business line of credit, sometimes called a business credit line, works similarly to a credit card. You're approved for a maximum credit limit during your draw period, then borrow funds as needed. You only pay interest on what you've used, and as you pay down the balance the funds become available to borrow again.

For example, your business might be approved for a $100,000 line of credit and withdraw $30,000 to purchase inventory. You pay interest on that $30,000 only. As you repay it, the $30,000 becomes available to draw again without having to reapply.

Key features of a line of credit:

  • Revolving access up to a credit limit
  • Interest charged only on the amount drawn
  • Often variable interest rates that move with the market
  • Payments may be weekly or monthly, depending on the lender
  • May or may not require collateral or a personal guarantee
  • Functions much like a high-limit business credit card, but typically with lower interest rates and direct cash access

If your business has uneven cash flow, seasonal revenue swings, or short-term gaps between receivables and payables, a line of credit fits that pattern. The Federal Reserve's 2024 Small Business Credit Survey found that 51% of small businesses cite uneven cash flow as a financial challenge, meaning roughly half of business owners are navigating exactly the situation a line of credit is built for.

When to use a term loan

  • If you have a single, planned purchase with a known cost, then a term loan often makes sense. Equipment, vehicles, build-outs, and acquisitions are common examples.
  • If you want predictable monthly payments, then a fixed-rate term loan removes the rate-fluctuation risk that comes with variable-rate products.
  • If you're consolidating higher-cost debt, then a term loan can replace several variable balances with a single fixed payment.‍
  • If you're financing a long-lived asset, then matching the loan term to the asset's useful life keeps repayment in proportion to the value the asset produces.

When to use a line of credit

  • If your funding need is recurring or hard to predict, then a line of credit gives you on-demand access without reapplying for a new loan each time.
  • If your business is seasonal, then a line of credit can cover slow months and be repaid during peak season.
  • If you need to bridge accounts payable and accounts receivable, then a short-term draw and repayment cycle fits cleanly.‍
  • If you want to capture an opportunity quickly, such as discounted inventory, a same-week supplier deal, or an unexpected repair, then revolving access is hard to beat.

Cost considerations: Rates, fees, and total cost of borrowing

Interest is the headline cost on either product, but the total cost of borrowing depends on the full fee structure. When you compare offers, look at the rate alongside the fees and the repayment cadence.

Term loan costs commonly include:

  • Interest (often fixed)
  • Origination fee
  • Application fee
  • Late-payment fees
  • Prepayment penalty (not always present)

Line of credit costs and fees commonly include:

  • Interest (Line of credit interest rates are often variable, charged only on the amount drawn)
  • Annual or maintenance fee
  • Origination or set-up fee
  • Draw fees (per-draw or per-month)
  • Late-payment fees

Term loans often carry lower headline interest rates than lines of credit because the lender is taking on a single, structured exposure with a known repayment schedule. A line of credit prices in the optionality you get to draw, repay, and re-draw on demand, and variable interest rates can move during the life of the credit line. To compare apples to apples, run the numbers with Lendio's business loan calculator for a term loan and a line of credit calculator for a draw scenario you'd actually use.

Lender appetite shifts the picture, too. The Federal Reserve's Senior Loan Officer Opinion Survey showed banks tightening standards on small business C&I loans through late 2025, meaning higher approval bars and, for many borrowers, higher pricing across both products. Knowing the current environment helps you read offers in context rather than in isolation.

What this comparison does not decide.

This page explains how a term loan and a business line of credit differ in structure, cost, and best-fit use. It does not determine your eligibility for either, predict approval likelihood, or quote the rate you'll be offered. Those depend on your credit profile, time in business, revenue, collateral, and the individual lenders underwriting.

A brief look at eligibility.

Lenders look at similar factors for both products: credit score, time in business, annual revenue, debt-to-income, and (for some products) collateral. Your credit score in particular shapes both whether you qualify and the interest rates you're offered. Standards differ across banks, online lenders, and SBA-backed lenders, so the cleanest path is to check requirements before you apply.

Can you have a business term loan and a line of credit at the same time?

Yes. Many small business owners deliberately use both: a term loan for a planned, long-term investment and a line of credit standing by for working capital and short-term gaps. Two open balances will mean two underwriting reviews and two debt obligations, so make sure your cash flow can support both before stacking them.

Summary and decision takeaways.

A term loan is built for predictability and one-time investments; a line of credit is built for flexibility and ongoing needs. The structure of each product, not the headline rate alone, should drive the decision.

  • Use a term loan for a single, planned purchase you can repay on a fixed schedule.
  • Use a line of credit for recurring or unpredictable expenses where on-demand access matters.
  • Compare total cost of borrowing — rate plus fees — not just the headline interest rate.
  • Match the financing structure to the life of the expense: long-term asset, long-term loan; short-term gap, short-term draw.
  • Term loans and lines of credit are not your only options — equipment financing, revenue-based financing, a personal loan, or an SBA loan may fit certain situations better.

Individual outcomes vary based on your business profile, the lender, and current credit conditions.