Article
Business Line of Credit vs Term Loan: Which Fits the Need?
Short answer
Use a line of credit for short, repeating gaps between paying costs and getting paid; you draw what you need, repay, and draw again. Use a term loan for a one-time investment that pays off over years, repaid in fixed installments. Mixing them up, such as buying equipment on a line, is a common cause of cash strain.
Key points
- Match the term of the money to the life of what it pays for.
- Lines usually charge interest only on the amount drawn and are often variable-rate; many have annual fees and renewal reviews.
- Term loans give a predictable payment schedule; check prepayment terms.
- Banks may require a line to be paid down to zero for a period each year to show it isn't permanent funding.
The question owners usually ask is "which is cheaper?" A better first question is "what is the money for, and how long until it comes back?"
Side by side
| Line of credit | Term loan | |
|---|---|---|
| How you get money | Draw as needed up to a limit | Lump sum at closing |
| Interest | On the drawn balance; often variable | On the full balance; fixed or variable |
| Repayment | Interest-only or minimums; repay and redraw | Fixed installments over the term |
| Typical term | One to a few years, then renewed | Several years; longer for real estate |
| Fees | Origination, annual or unused-line fees, sometimes draw fees | Origination, sometimes prepayment penalties |
| Best for | Payroll before receivables arrive, seasonal inventory, timing gaps | Equipment, vehicles, renovations, buying a business, refinancing |
The matching principle
Finance short needs with short money and long needs with long money.
- A landscaping company that buys mulch in March and gets paid in May has a two-month gap that repeats every year. A line fits: draw in March, repay in May.
- The same company buying a $90,000 truck it will use for seven years needs a term loan or equipment financing. Putting the truck on the line ties up the line for years, leaves nothing for the spring gap and risks a renewal problem if the bank reviews the line and sees it never comes down.
Lenders look for the same match. A line that's always maxed out signals the business is using it as permanent capital, which is why some banks require a "clean-up period" where the balance must be paid to zero for a stretch each year.
Comparing the cost
For a term loan, compare APR and total interest across offers with the same term. For a line, estimate a realistic average balance and how many months you'll carry it, then add annual and unused-line fees. A line with a low rate but a high annual fee can cost more than a slightly higher rate with no fee if you rarely draw on it. Our loan payment calculator handles the term-loan side.
SBA versions
SBA Express can be used for revolving lines of up to 10 years, and SBA's CAPLines program offers lines for seasonal, contract, builder and working capital needs. Standard 7(a) term loans run up to 10 years for most purposes and up to 25 for real estate.
Where owners go wrong
- Funding long-lived assets on a line, then being squeezed at renewal.
- Taking a term loan for a short, one-off gap and paying interest long after the need has passed.
- Ignoring variable-rate risk: a line priced at prime plus a margin gets more expensive when rates rise.
- Not reading covenants, such as minimum debt service coverage or limits on other borrowing.
Sources
- SBA: Types of 7(a) loans (SBA Express and CAPLines revolving lines)
- SBA: 7(a) loans (repayment of term loans)
- Federal Reserve Banks: 2026 Report on Employer Firms
Checked November 9, 2026. Program rules and scoring models change; the source is the authority.