When deciding between a business line of credit and a term loan, it’s important to understand their core differences:
- Business Line of Credit: Works like a credit card. Borrow as needed, repay, and borrow again. You only pay interest on what you use. Great for short-term or flexible needs like managing cash flow, covering seasonal expenses, or handling unexpected costs.
- Term Loan: Provides a lump sum upfront with fixed monthly payments. Ideal for large, one-time expenses like equipment purchases, real estate, or business expansion. Interest is charged on the full amount from day one.
Quick Comparison
| Feature | Business Line of Credit | Business Term Loan |
|---|---|---|
| Funding Structure | Revolving credit – borrow as needed | Lump sum received upfront |
| Repayment Schedule | Flexible – pay as you borrow | Fixed monthly installments |
| Interest Charges | Only on the amount borrowed | Charged on the full loan amount |
| Interest Rates | 10%–99% APR (often variable) | 6.54%–99% APR (typically fixed) |
| Best For | Short-term or fluctuating needs | Large, one-time investments |
Tip: Use a line of credit for ongoing expenses, and a term loan for long-term projects. Picking the wrong option could increase costs or lead to repayment challenges.
What Is a Business Line of Credit
A business line of credit is a flexible way for businesses to access funds when they need them. Unlike traditional loans, which provide a lump sum upfront, a line of credit offers a maximum borrowing limit – usually between $10,000 and $250,000 for unsecured options – that businesses can draw from as needed.
The standout feature of a line of credit is its revolving nature. You only pay interest on the amount you use, not the total credit limit. Once you repay what you’ve borrowed, the funds become available again. This makes it especially handy for businesses dealing with unpredictable expenses or seasonal cash flow fluctuations.
Most business lines of credit are unsecured, meaning you don’t need to offer collateral like real estate or equipment to qualify. Instead, lenders determine your credit limit based on factors such as your business’s revenue, credit history, and how long you’ve been in operation. The way it works, its repayment structure, and its versatility highlight why this option appeals to many businesses.
How Business Lines of Credit Work
After approval, you can access your line of credit through online banking, checks, or even a linked business card. Whether you need $500 for an unexpected repair or $15,000 to restock inventory, you can draw funds as required.
The revolving credit structure offers flexibility. For example, if you have a $50,000 line of credit, you might use $10,000 in January for inventory, repay $5,000 in February, and then withdraw $8,000 in March for marketing. Your available credit adjusts automatically as you borrow and repay.
Interest is only charged on the amount you use, unlike traditional loans where interest starts accumulating as soon as you accept the funds. You can keep the credit line open for years, using it only when you need it.
Repayment and Interest
Repayment terms for business lines of credit are typically more flexible than those of traditional loans. Most lenders require minimum monthly payments based on your outstanding balance. You can stick to the minimum, make larger payments to save on interest, or pay off the entire balance whenever you like.
Interest rates generally range from 7.44% to 8.57%, though your rate will depend on your credit profile. For example, Wells Fargo’s BusinessLine offers variable rates from Prime + 1.75% to Prime + 9.75%. These rates are often lower than those of business credit cards, which can exceed 20% APR.
Most lines of credit have variable interest rates, meaning they can shift based on market conditions. While some lenders offer fixed or introductory rates, variable rates are more common. The upside? Paying off your balance early reduces interest costs and frees up credit for future use.
Dr. Alan Patel of BrightSmile Dental Group shared his experience:
"The flexibility was great, but I was surprised by how much the fees impacted my bottom line. Between draw fees, monthly maintenance charges, and a higher-than-expected interest rate, it cost more than I planned. Now I only use the line for short-term needs and keep a close eye on the repayment terms. It’s useful – if you use it wisely."
Best Use Cases
Business lines of credit are perfect for situations where you need quick access to funds without the delays of a traditional loan approval process. They’re especially helpful for managing the everyday financial hurdles businesses often encounter.
One common use is cash flow management. For instance, a family-owned restaurant used their line of credit to cover payroll during a slow winter season, repaying it once summer revenue picked up. Similarly, a consulting firm used their credit line to pay new hires while awaiting payment from a corporate client.
They’re also ideal for inventory and seasonal needs. Small retailers often draw from their lines to purchase inventory ahead of busy seasons, paying it back once sales increase. Gardyn, a gardening company, uses its credit line for both inventory and advertising expenses to meet growing demand.
For unexpected expenses, a line of credit can be a lifesaver. A small retail boutique, for example, used their credit line to cover HVAC repairs, repaying the balance gradually as revenue came in.
Another great use is for business expansion and opportunities. A coffee shop used their credit line to cover the lease deposit and renovations for a second location, repaying the funds with profits from both stores. Marcia Layton Turner launched her ghostwriting business over 20 years ago with a $10,000 credit line, which she used to invest in equipment and marketing.
The law firm Templer & Hirsch offers a great example of strategic growth:
"The law firm used a line of credit to pay for unexpected costs and make investments in essential areas like technology and hiring new staff. For example, during one of their busy times, they had to hire more people to handle many cases. The line of credit allowed them to hire talented people without worrying about money, ensuring their customers got the excellent service they deserved."
What Is a Business Term Loan
A business term loan provides a one-time lump sum of money that you repay over a fixed period, with added interest. Unlike a line of credit, where you borrow funds as needed, a term loan gives you the entire amount upfront. These loans are offered by banks, credit unions, online lenders, and other financing companies. Loan amounts typically range from $5,000 to $5 million, with APRs varying between 6% and 99%, depending on your credit profile and lender. Repayment terms usually span anywhere from 6 months to 7 years, offering structured timelines to suit different needs. This fixed funding structure sets term loans apart from the flexibility of lines of credit.
How Business Term Loans Work
To qualify for a business term loan, you’ll need to demonstrate your creditworthiness through financial documents. Lenders will evaluate whether your business can handle the repayments and has reliable revenue streams.
Once approved, you’ll receive the loan amount in full, and interest starts accruing immediately. Unlike a line of credit, where you borrow funds only when needed, this loan type begins charging interest right away.
Term loans come with either fixed or variable interest rates and have a set maturity date for the final payment. Most term loans require collateral – such as equipment, real estate, or inventory – and typically involve a more rigorous approval process. Repayments are made in fixed installments, which are usually monthly or quarterly.
Repayment and Interest
One of the key benefits of business term loans is their predictable repayment schedule, which makes budgeting and cash flow management simpler. This consistency helps businesses plan their finances more effectively.
Interest rates for term loans are often more competitive compared to other financing options. As of April 2024, fixed-rate loans from traditional banks typically offer rates between 6% and 36%. Here’s a snapshot of what some lenders offer:
- National Business Capital: 3.25% to 15% APR
- Lendio: 6% to 30% APR
- Bluevine: 7.8% to 43% APR
Most term loans feature fixed interest rates, meaning the rate remains unchanged throughout the loan term. This differs from lines of credit, which often have variable rates that fluctuate with the market. Term loans also tend to have lower interest rates than credit cards or cash advances. However, some lenders may impose penalties for early repayment.
Best Use Cases
Business term loans are ideal for large, one-time investments. They work well for projects that are expected to generate returns over time, helping businesses grow strategically.
Common applications include:
- Equipment and inventory purchases: Whether it’s buying machinery, vehicles, or seasonal stock, term loans provide the upfront capital needed for these investments. Aligning the loan term with the asset’s lifespan is essential.
- Real estate transactions: Term loans can fund commercial property purchases, construction projects, or major renovations. Long-term loans are particularly suited for real estate, as the value of such assets often increases over time.
- Debt consolidation: Managing multiple high-interest debts? A term loan can combine them into a single, more manageable monthly payment.
- Business expansion projects: Whether you’re hiring staff, opening new locations, or launching products, term loans provide the capital to fuel growth. The structured repayment plan is especially helpful for projects that take time to yield returns.
- Working capital needs: For businesses navigating growth phases or seasonal fluctuations, a term loan can supply the necessary funds. This is particularly useful for companies with long sales cycles or those preparing for peak seasons.
With their upfront funding and predictable payments, term loans are a practical choice for businesses looking to make substantial investments or manage financial challenges effectively.
Business Line of Credit vs Term Loan: Side-by-Side Comparison
The main distinction between a business line of credit and a term loan lies in how the funds are accessed and repaid. A business line of credit works like a revolving credit account, allowing you to borrow, repay, and borrow again as needed, up to a set limit. On the other hand, a business term loan provides a one-time lump sum upfront, which is paid back in fixed monthly installments over a specified period. While term loans offer predictable payments, they lack the flexibility of a line of credit, which can adapt to fluctuating financial needs.
With a line of credit, you only pay interest on the amount you actually borrow, making it a cost-effective option for handling variable expenses. In contrast, term loans charge interest on the full loan amount from the start. The repayment structure also differs significantly: term loans come with fixed monthly payments, making budgeting straightforward, while lines of credit often feature flexible repayment options, with some lenders even offering interest-only payments for a set period.
Interest rates further set these two options apart. Traditional bank term loans generally have rates ranging from 6.54% to 11.7%, while online term loans can go as high as 14% to 99% APR. Business lines of credit typically carry rates between 10% and 99% APR. Term loans often have fixed rates, ensuring payment stability, whereas lines of credit usually come with variable rates that can shift with market trends.
Comparison Table: Business Line of Credit vs Term Loan
| Feature | Business Line of Credit | Business Term Loan |
|---|---|---|
| Funding Structure | Revolving credit – borrow as needed up to limit | Lump sum received upfront |
| Interest Charges | Only on the amount borrowed | Charged on the entire loan amount from day one |
| Repayment Schedule | Flexible – repay and re-borrow | Fixed monthly installments |
| Interest Rates | 10% to 99% APR (often variable) | 6.54% to 99% APR (typically fixed) |
| Ideal For | Managing cash flow and covering short-term needs | Large investments such as equipment purchases |
| Flexibility | High – access funds repeatedly | Low – one-time funding |
| Predictability | Variable payments based on usage | Fixed, predictable payments |
The choice between these two financing options depends on your business’s unique needs. A line of credit is ideal for managing cash flow fluctuations or covering short-term expenses like payroll or unexpected costs. In contrast, a term loan is better suited for significant investments such as purchasing equipment or real estate, where having a fixed repayment structure and stable access to capital is more advantageous.
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How to Choose the Right Option for Your Business
When deciding between a business line of credit and a term loan, it all comes down to understanding your specific funding needs, cash flow situation, and what approval requirements you can meet. Essentially, the right choice depends on how you plan to use the funds, your cash flow patterns, and how well you meet a lender’s criteria for approval.
Evaluate Your Funding Needs
Start by identifying exactly why you need the funds. If you’re planning a one-time investment – like buying equipment, acquiring property, or expanding your business – a term loan might be your best bet. These loans offer structured repayment schedules and often come with lower interest rates, making them ideal for larger, long-term investments.
On the other hand, if your business faces ongoing or unpredictable financial needs, a line of credit may be the better option. Whether it’s managing seasonal revenue dips, covering unexpected expenses, or handling day-to-day costs like payroll during slower periods, lines of credit provide the flexibility to borrow as needed and repay when you can.
To simplify: use term loans for major, one-time expenses and lines of credit for short-term or fluctuating financial needs. Before applying for either, take time to clearly assess your funding goals.
"Understanding the difference between a term loan and a line of credit ensures you choose the right financing tool for your business. By considering the purpose of the loan, the repayment structure, and the overall costs, you can make a decision that supports your business’s long-term success." – Josh Andrade, AVP / Relationship Manager, Small Business Banking
Once you’ve nailed down your funding needs, it’s time to think about how repayment will affect your cash flow.
Consider Cash Flow and Repayment Structure
Term loans are a good fit for businesses with steady cash flow, thanks to their predictable monthly payments. Meanwhile, lines of credit are more flexible – you only pay interest on the amount you borrow, which can help keep cash flow manageable during slower periods.
However, keep in mind that lines of credit often have variable interest rates, which means your costs could rise if market rates go up. It’s important to evaluate whether your cash flow can handle these potential fluctuations.
For short-term or transitional needs, lines of credit are often more practical since they allow you to borrow, repay, and borrow again as needed. Term loans, on the other hand, are better for larger investments that will generate returns over time, offering higher loan amounts and usually lower interest rates.
Approval Requirements to Consider
Qualifying for a business line of credit is generally easier than getting approved for a term loan, but both require lenders to review similar criteria. Factors like your personal and business credit scores, time in business, annual revenue, and current debt levels all come into play.
To improve your chances of securing favorable terms, gather all necessary documentation in advance. This includes financial records, identification, and a clear business plan. A strong credit history, consistent revenue, and a low debt-to-income ratio can significantly boost your approval odds for either option.
If your business has a limited credit history, you might consider a secured line of credit. While this may require collateral or additional paperwork, it can open up funding opportunities that unsecured options might not provide.
Term loans typically offer larger loan amounts and lower interest rates, but they also come with stricter qualification standards. Lines of credit, while more flexible, often start with lower credit limits and variable interest rates that could fluctuate over time.
How TermLoans.com Can Help
TermLoans.com makes securing business funding straightforward by connecting you with over 400 top lenders through a single, quick application. This streamlined process allows you to compare multiple loan offers and select the terms that best fit your needs – all in just a few minutes. To make things even easier, their AI-powered agent simplifies applications by auto-filling forms, saving you time and reducing the stress of paperwork.
The AI agent doesn’t just save time – it helps your application stand out. By pre-filling even the trickiest parts of the paperwork, it ensures your business presents a strong case to lenders. As TermLoans.com explains:
"The loan process can be confusing and time-consuming, so we built an AI-powered agent to simplify it for you. As you move through the process, our AI automatically pre-fills complex paperwork – even the toughest questions – making your business shine and reducing the risk you pose to lenders." – TermLoans.com
With TermLoans.com, the entire process takes just 2 minutes, and you could get approved in as little as 24 hours. Compare that to competitors, where applications often take 15 minutes or more, and approvals can stretch to 3–5 days. Plus, you can explore prequalified loan offers without affecting your credit score, giving you peace of mind while weighing your options.
What truly sets TermLoans.com apart is its inclusive approach to credit requirements. While many lenders expect a credit score of 720 or higher, TermLoans.com works with businesses with FICO scores as low as 500+. This flexibility opens doors for a wider range of businesses, regardless of their credit history.
As the company puts it:
"At TermLoans, we cater to both individuals with good and bad credit. We understand that your credit score is just one aspect of your financial health. Our goal is to find the best loan terms and highest amounts by setting up your file for success, regardless of your credit score."
TermLoans.com has already helped businesses secure over $500 million in funding and boasts a stellar 4.9/5 rating from more than 2,500 reviews. Their process includes 1-on-1 support from experienced loan and credit experts who use a 36-point system to find the best rates and highest loan amounts for your business.
If you’ve struggled with loan denials in the past, TermLoans.com can help turn things around. Their team identifies issues with prior applications and adjusts your file to improve your chances of approval. They also offer expert credit-boosting services and perform initial evaluations without hard credit checks, so your score stays protected while you explore options.
| Feature | TermLoans.com | Typical Competitors |
|---|---|---|
| Application Time | 2 minutes | 15+ minutes |
| Approval Speed | 24 hours | 3–5 days |
| Credit Score Requirements | 500+ FICO | 720+ FICO |
| APR Starting At | 0% | 30%+ |
| Prepayment Fees | None | Often charged |
| Customer Support | 24/7 live chat | Limited hours |
Whether you need financing for a big investment or a short-term cash flow boost, TermLoans.com offers a fast, efficient process backed by a vast network of lenders to meet your business needs.
Conclusion
Deciding between a business line of credit and a term loan comes down to your specific financing needs and long-term goals. Term loans deliver a lump sum upfront with fixed monthly payments, making them a solid choice for one-time investments like purchasing equipment, acquiring property, or funding major expansions. On the other hand, lines of credit provide flexible access to funds up to a set limit, which works well for managing cash flow fluctuations or covering unexpected expenses. Understanding these differences is key to making a well-informed decision.
Term loans often feature fixed interest rates and structured repayment plans that simplify budgeting. In contrast, lines of credit offer revolving access with variable rates, and you only pay interest on the funds you actually draw – unlike term loans, where interest accrues on the entire principal from the start.
"Understanding the difference between a term loan and a line of credit ensures you choose the right financing tool for your business. By considering the purpose of the loan, the repayment structure, and the overall costs, you can make a decision that supports your business’s long-term success."
It’s important to align the financing tool with your needs. Using a line of credit for long-term investments or a term loan for short-term operational costs can lead to unnecessary financial strain and higher expenses.
Whether you’re seeking structured funding for a large project or flexible capital to manage daily operations, choosing the right financing option can propel your business forward. TermLoans.com offers tailored solutions, including term loans and lines of credit, with a simple online application process and transparent terms to help you secure the funding that best supports your business.
FAQs
How can I determine if a business line of credit or a term loan is the right choice for my business?
When deciding between a business line of credit and a term loan, it’s all about understanding your business’s financial needs and goals.
A term loan works well for large, one-time expenses like buying equipment, expanding your workspace, or purchasing property. With this option, you get a lump sum upfront, repay it in predictable monthly installments, and often benefit from lower interest rates.
A business line of credit, however, is better for handling ongoing expenses, bridging seasonal cash flow gaps, or covering unexpected costs. It offers flexibility – you can draw funds as needed and only pay interest on what you actually use.
Think about whether you need a fixed amount for a specific purpose or a more flexible funding option to decide which is the right fit for your business.
What are the risks of using a business line of credit compared to a term loan?
A business line of credit can come with some challenges. For one, interest rates are often higher, particularly if the credit remains unused or if spending exceeds planned limits. Over time, this can lead to mounting costs. Additionally, fluctuating interest rates can introduce uncertainty and make managing cash flow more difficult. There’s also the risk of overspending, which might put your business in a tough financial spot.
On the flip side, a term loan provides the advantage of predictable, fixed payments, making it easier to plan your budget. However, term loans can be less flexible. For instance, they might include penalties for early repayment, which could be frustrating if you want to settle the loan ahead of schedule.
Each option has its own set of advantages and limitations, so it’s essential to pick the one that best suits your business’s financial goals and circumstances.
What are the differences in interest rates between a business line of credit and a term loan, and how do they impact costs?
Interest rates for a business line of credit can vary widely, typically falling between 6% and 60%. Variable rates often land on the higher end of that spectrum. In contrast, term loans tend to come with lower, fixed rates, usually hovering around 7% to 8%.
The flexibility of a line of credit comes with a trade-off – its variable rates can increase borrowing costs over time, especially if market rates rise. On the flip side, term loans offer the stability of fixed rates, ensuring consistent payments. This predictability can make budgeting simpler and could help lower your total costs over the life of the loan. Knowing these distinctions is key to aligning your financing choice with your business’s financial strategy.
