Line of Credit vs Term Loan: Which Fits Your Business?

The structural difference in one paragraph

A business line of credit gives you an approved limit. You draw what you need, interest accrues only on the drawn balance, and repaid funds become available again. A business term loan gives you the full amount at closing, on a fixed payment schedule to a fixed end date, and repaid principal is gone rather than reusable.

That single difference drives everything else: cost, how underwriting sizes the offer, and which structure your cash flow can actually absorb.

Side-by-side comparison

• •Amount: line of credit $10,000 – $1,000,000; term loan $25,000 – $5,000,000
• •Speed: line of credit approved in 1–3 days; term loan funded in 2–7 days
• •Access: line of credit is reusable up to the limit; term loan is a one-time draw
• •Cost basis: line of credit charges interest on the drawn balance plus draw and maintenance fees; term loan charges a fixed APR across the whole balance
• •Payment: line of credit payment varies with usage; term loan payment is fixed and predictable

Qualification thresholds

Both products are underwritten primarily on business bank deposits rather than on a single credit score, but the published minimums differ.

• •Line of credit: 12+ months in business, $15,000 monthly revenue, 625 FICO, application plus 3 months of bank statements
• •Term loan: 12+ months in business, $25,000 monthly revenue, 600 FICO, application plus 3 months of bank statements
• •Requirements vary by funding provider and jurisdiction, and final terms are set after full underwriting

Where the line of credit is cheaper

If the need is recurring and short — covering payroll while receivables clear, buying inventory eight weeks before a season, funding materials between progress draws — a line is usually the cheaper structure because you carry the balance for weeks rather than years.

The trap is the fee schedule. A per-draw fee applied several times a year can exceed the interest on a facility that is drawn and repaid quickly. Price your actual usage pattern with the [line of credit calculator](/tools/line-of-credit-calculator) before assuming the lower headline rate wins.

Where the term loan is cheaper

If the need is a single known amount held for a year or more — an expansion, a consolidation of expensive short-term positions, a build-out — the term loan is normally cheaper and far easier to budget. The rate is fixed at signing, so later benchmark moves do not change your payment.

Model the payment and total interest with the [loan payment calculator](/tools/loan-payment-calculator), then confirm your deposits support it using the [debt service calculator](/tools/debt-service-calculator).

How each one affects your next application

A line of credit that cycles — drawn, repaid, drawn again, with the balance well below the limit — generally supports a future limit review. A facility sitting permanently at its limit reads as cash-flow strain instead.

A term loan adds a fixed monthly obligation to your debt service, which reduces the headroom on your next request until the balance amortises down. Keeping total debt service under roughly 15% of monthly deposits keeps most files comfortable.

Common mistakes

• •Comparing a line's interest rate to a term loan's APR without adding draw and maintenance fees
• •Taking a multi-year term loan for a need that lasts one season
• •Using a revolving line as permanent working capital and never paying it down
• •Ignoring non-utilisation or annual fees on a facility you rarely draw