Term loan: one-time lump sum, fixed monthly P&I over 1-10 years. Best for predictable one-time investments. Line of credit: revolving, draw what you need, repay, redraw. Best for variable cash-flow management. Term loan APRs run 7-25%; line of credit APRs run 8-30% with annual fees on top. Term loans win on cost when funds are held 12+ months; lines win on flexibility for 20-60% average utilization. Many established businesses run both for different uses of funds.
The term-loan-vs-line-of-credit decision is the second most common financing choice (after MCA-vs-WCL) for established U.S. small businesses. Both products fund a wide range of uses but with very different structures, costs, and underwriting. This guide compares them on the dimensions that actually matter and shows when each one fits. For broader context see business term loans and business line of credit.
Structural Comparison
| Dimension | Term Loan | Line of Credit |
|---|---|---|
| Structure | One-time lump sum | Revolving credit |
| Repayment | Fixed monthly P&I | Interest-only on drawn balance + min principal |
| Term | 1-10 years | 12 months renewable |
| Typical APR | 7-25% | 8-30% |
| Other fees | Origination 1-5% | Annual fee + draw fee + non-utilization fee |
| Min FICO | 660-680 | 660-700 |
| Min TIB | 2 years | 1-2 years |
| Best for | One-time investments | Variable cash-flow needs |
When a Term Loan Fits
- Acquisition — buying a business or buying out a partner. One-time use of funds with predictable cost.
- Major equipment — large equipment purchase financed as a single asset. Often better to use equipment financing specifically (asset-secured, lower rates) than a term loan.
- Real estate — commercial property purchase. Use commercial real estate loan for true CRE; term loan for buildouts on leased space.
- Debt consolidation — refinancing multiple high-cost loans into a single fixed-payment structure.
- Expansion — opening a new location, adding a major product line. Predictable cost over a defined timeline.
When a Line of Credit Fits
- AR/AP gap — you invoice customers on net-30/60 but pay suppliers and payroll on net-7/15. Line of credit covers the timing mismatch.
- Seasonal inventory — you stock heavy in October-November for holiday sales. Line lets you draw to buy inventory and repay as it sells.
- Opportunistic purchases — vendor offers a big discount for cash. Line lets you grab the deal without locked-in long-term debt.
- Emergency reserve — you do not need cash today but want it standing-by for slow months or unexpected expenses.
- Project-driven cash flow — contractors funding job costs while waiting for progress payments.
Real Cost Comparison: $100K of Capital, 12 Months
Same $100K, two structures:
- Term loan: $100K, 5-year, 12% APR, 2% origination. Monthly P&I = $2,224. Year-1 cost: $7,400 (interest portion + origination). Total over 5 years: $33,400.
- Line of credit (full draw, 12 months): $100K limit drawn day 1, 14% APR, $1K annual fee. Year-1 cost: $14,000 + $1,000 = $15,000.
- Line of credit (50% avg utilization): $50K average outstanding, 14% APR, $1K annual fee. Year-1 cost: $7,000 + $1,000 = $8,000.
- Line of credit (20% avg utilization): $20K average outstanding. Year-1 cost: $2,800 + $1,000 = $3,800.
The break-even is around 50% utilization. Below that, the line wins decisively. Above it, the term loan wins because the line's higher APR + annual fee compounds.
The Combined Strategy
Mature small businesses often run both products: a term loan funding a specific one-time investment (acquisition, expansion, major equipment) plus a working capital line for ongoing fluctuation. Banks often prefer borrowers who have both because it signals understanding of capital structure. The line stays largely undrawn most months and shows up as available liquidity on the balance sheet, while the term loan is amortizing on schedule.
Caveat: do not use a line of credit to make term-loan payments. That is a debt spiral signal lenders watch for; if the operating cash flow does not service the term loan independently, you have a coverage problem the line will not fix.
Next Step
If you have a defined use of funds and need to know which product fits, compare term loan and line-of-credit offers — one application to multiple lenders, transparent APRs and fees.