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When your business needs funding, two options come up again and again: a business loan vs line of credit. Both put capital in your hands, but they work in completely different ways — and choosing the wrong one can cost you thousands in unnecessary interest or leave you short when cash flow tightens.
This guide breaks down every meaningful difference between the two products, from how they’re structured and priced to how they show up on your credit report. By the end, you’ll know exactly which one fits your situation — or whether you actually need both.
Quick Comparison: Business Loan vs Line of Credit
| Feature | Term Loan | Line of Credit |
|---|---|---|
| Funding structure | Lump sum upfront | Revolving credit limit |
| Repayment | Fixed monthly payments | Pay only what you draw |
| Typical interest rates | 6% – 30% APR | 7% – 25% APR |
| Credit score (min. typical) | 600 – 680+ | 620 – 700+ |
| Best for | One-time purchases | Ongoing working capital |
| Credit report impact | Installment account | Revolving account |
| Reusable funds | No | Yes |
What Is a Business Term Loan?
A business term loan delivers a fixed lump sum that you repay over a set period — typically 1 to 10 years — through scheduled monthly payments of principal and interest. The rate can be fixed or variable, and the full amount is disbursed on day one whether you use it all or not.
How it works in practice: You borrow $80,000 to buy a piece of equipment. Your lender deposits $80,000 into your account. You make equal monthly payments over 5 years until the balance reaches zero. The loan then closes — it is non-revolving, meaning you cannot draw from it again.
Typical credit score requirements: Most banks require a personal credit score of 680 or higher, though SBA loans and online lenders may approve borrowers at 600–640 for smaller amounts. Time in business (usually 2+ years) and annual revenue also factor heavily into approval.
On your credit report: A term loan appears as an installment account. Credit bureaus track your original balance, current balance, and payment history. As your balance drops with each payment, your credit utilization on that specific account improves, which can modestly boost your business and personal credit scores over time.
What Is a Business Line of Credit?
A business line of credit gives you access to a revolving pool of funds up to an approved credit limit. You draw only what you need, when you need it, and you only pay interest on the amount currently outstanding — not the full limit. As you repay the drawn balance, those funds become available to borrow again.
How it works in practice: You’re approved for a $50,000 credit line. In March, you draw $15,000 to cover payroll. You pay it back in April. In June, you draw $22,000 to buy seasonal inventory. That flexibility — draw, repay, draw again — is what makes a line of credit fundamentally different from a term loan.
Lines of credit can be secured (backed by assets or a blanket lien on business assets) or unsecured. Unsecured lines are common but carry higher rates and stricter credit requirements.
Typical credit score requirements: Lenders generally want a score of 620–700+ for an unsecured line. Banks may set the bar at 700 or above. Some online lenders offer lines to borrowers at 580–600, though rates will be significantly higher.
On your credit report: A line of credit shows up as a revolving account, similar to a business credit card. Your credit utilization ratio — how much of your available credit you’re using — directly affects your score. Keeping utilization below 30% of your credit limit is considered best practice for credit health.
Cost Comparison: Which Is Cheaper?
On paper, the rate ranges overlap: term loans run roughly 6% to 30% APR and lines of credit typically land between 7% and 25% APR. But total cost depends on how you use the money.
- Term loan total interest is calculated on the full disbursed amount from day one, even if you didn’t immediately deploy every dollar.
- Line of credit total interest is calculated only on what you’ve drawn and for how long you hold the balance. If you draw $20,000 for 45 days, you pay 45 days of interest on $20,000 — nothing more.
For a large, one-time purchase you’ll use immediately, a term loan’s fixed rate can be more cost-effective. For unpredictable, short-term cash needs, a line of credit almost always costs less in total interest because you avoid paying for money you aren’t using.
Watch for fees on both products: origination fees (0.5%–3%), annual maintenance fees on credit lines ($100–$500/year), and draw fees (1%–2% per draw on some LOCs) can meaningfully change your effective cost.
When to Choose a Business Term Loan
A term loan is the right tool when you have a clearly defined, one-time capital need and prefer payment predictability.
- Equipment or machinery purchase: Buying a $120,000 CNC machine? A term loan matches the asset’s useful life with a structured repayment schedule — and the equipment often serves as collateral, lowering your rate.
- Commercial real estate acquisition: Purchasing or renovating a facility requires a large, fixed amount. Long-term amortization (10–25 years) keeps monthly payments manageable.
- Business acquisition: Buying an existing business involves a precise purchase price. A term loan covers that exact amount with terms structured around projected cash flow.
- Debt consolidation: Rolling several high-interest debts into one lower-rate term loan simplifies your payment structure and reduces monthly obligations.
- Large one-time marketing or expansion project: Opening a second location or funding a product launch has a defined cost. A term loan funds it cleanly without the distraction of a revolving balance.
When to Choose a Business Line of Credit
A line of credit shines when your funding needs are ongoing, unpredictable, or seasonal in nature.
- Managing cash flow gaps: If customer invoices are on net-60 terms but your vendors want payment in 30 days, a credit line bridges that gap — and costs you almost nothing if paid back quickly.
- Seasonal inventory builds: Retailers, landscapers, and contractors often need a capital surge in one quarter. Draw the line, stock up, sell through, repay — repeat each year.
- Emergency operating reserves: Equipment breaks down, a client delays payment, a key employee leaves. A standing credit line means you handle these disruptions without scrambling for emergency financing.
- Payroll during slow periods: Service businesses with inconsistent revenue cycles use credit lines to make payroll without disrupting operations or employee morale.
- Opportunistic small purchases: A supplier offers a 15% discount on bulk inventory — but only for the next 48 hours. A credit line lets you act on opportunities without waiting for loan approval.
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