When your business needs money, the two options you’ll hear about most are a business line of credit and a term loan. Both can help, but they work very differently. Picking the right one comes down to one simple question: do you need a single lump sum, or ongoing access to cash? Here’s how to tell them apart.
How a term loan works
A term loan gives you a lump sum of cash upfront. You repay it, plus interest, on a fixed schedule until the loan is paid off. Once you’ve received the money, that’s it. If you need more later, you apply again.
Because you get the full amount on day one, you pay interest on the whole balance from the start, whether you’ve spent it yet or not.
How a business line of credit works
A business line of credit gives you a set limit you can draw from whenever you need funds. You might have a large limit but only draw a portion of it this month. You pay interest only on what you draw, not on your full limit.
As you repay, your available credit opens up again, so you can draw, repay and draw again without reapplying. That’s why it’s called revolving credit. Our lending partners offer credit lines up to $1,000,000, with terms of 12 to 36 months and weekly or monthly payments on the amount you’ve drawn.
The key differences
How you get the money. A term loan arrives all at once. A line of credit is there when you need it, in the amounts you need.
What you pay interest on. With a term loan, interest is charged on the full amount. With a line of credit, you pay interest only on the balance you’ve drawn.
Reusability. A term loan is one and done. A line of credit refreshes as you repay, so it can keep working for you.
Predictability. A term loan has a fixed payment schedule from the start, which some owners like for budgeting. With a line of credit, your payments depend on how much you’ve drawn.
When a line of credit makes more sense
A line of credit shines when your needs are ongoing or hard to predict. It works well for:
- Cash flow gaps. Cover payroll and bills while you wait on customers to pay invoices.
- Seasonal swings. Stock up on inventory before a busy season and repay once sales come in.
- Surprise expenses. Handle an urgent repair or a sudden opportunity without scrambling.
- Recurring costs. Smooth out the ups and downs of regular operating expenses.
The big advantage is that you’re not paying for money you aren’t using. If you don’t draw, you’re not paying interest on that money.
When a term loan makes more sense
A term loan can be a better fit for a large, one-time expense where you know the exact cost upfront, such as buying major equipment or real estate. If you need the full amount right away and plan to use all of it, a lump sum with a fixed repayment plan can make sense.
Can you have both?
Yes. Many businesses use a term loan for a big purchase and keep a line of credit open for day-to-day needs. They solve different problems, so they can work side by side. The key is making sure your total payments fit comfortably within your cash flow.
How to decide
Ask yourself a few questions:
1. Is this a one-time cost or an ongoing need? One-time points to a term loan; ongoing points to a line of credit. 2. Do I know exactly how much I need? If not, the flexibility of a line of credit helps. 3. Will I use all the money right away? If not, paying interest only on what you draw can save you money. 4. How does money come into my business? Pick a repayment schedule, weekly or monthly, that matches your cash flow.
What it takes to qualify
To be considered for a business line of credit through our lending partners, most applicants need at least one year in business, a business checking account, $50,000 or more in annual revenue and a personal FICO score of 625 or higher. See the full details on our eligibility page, or compare the line of credit options we help business owners explore, including an unsecured business line of credit that doesn’t require collateral for qualified businesses.
Find the right fit
Line of Credit LOC is a broker. We don’t lend money ourselves. You fill out one short application, and we match you with lending partners that offer revolving lines of credit. A funding advisor helps you compare your options so you can choose what fits. Apply now to see where you stand.
FAQ
Is a line of credit cheaper than a term loan?
It depends on the lender and your business. With a line of credit you pay interest only on what you draw, which can lower your cost if you don’t need the full amount at once. Always compare the total cost, including fees, before you sign.
Can I pay off a business line of credit early?
Repayment terms differ by lender. Some allow early repayment without a penalty. A funding advisor can help you compare this when you review offers.
Do I have to reapply each time I draw from a line of credit?
No. Once your line is open, you can draw up to your available limit. As you repay, that credit becomes available to use again.