Primary: business loan vs line of credit • Slug: /business-loan-vs-line-of-credit • Reading time: ~6–8 minutes
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Short answer: Choose a business loan for planned, one-off expenses where you want a fixed repayment schedule. Choose a business line of credit (revolving credit) when your company needs flexible access to funds for working capital, seasonal swings, or unpredictable expenses. Below we walk through practical use cases, a clear cost comparison, and the application steps so you can decide which suits your business.
Use cases
Business Loan (Term Loan)
Term loans deliver a lump sum upfront with a fixed or variable repayment schedule. Typical uses:
- Buying equipment or vehicles
- Funding expansion or a new location
- Acquiring a business
- Refinancing higher-cost debt
Line of Credit (Revolving Credit)
Lines of credit let you draw funds up to a limit, repay, and draw again — similar to a business credit card but often with lower rates. Typical uses:
- Managing seasonal cash flow or payroll
- Buying inventory for spikes in demand
- Covering short-term gaps between receivables and payables
- Emergency liquidity without reapplying
Short term loan vs revolving credit — quick checklist
| Feature | Term Loan | Line of Credit |
|---|---|---|
| Best for | Planned investments | Ongoing cash flow needs |
| Repayment | Fixed schedule | Flexible (minimum payments on outstanding balance) |
| Access to funds | Lump sum | On-demand up to limit |
| Interest | Often fixed or predictable | Often variable; can be higher when drawn |
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Cost comparison
Comparing cost means looking at the full price: interest rate (APY/APR), origination or draw fees, unused-line fees, prepayment penalties, and collateral requirements.
Typical cost components
- Interest rate: Term loans frequently have fixed or structured rates; lines typically carry variable rates tied to a benchmark + margin.
- Fees: Term loans often charge origination fees; lines can have maintenance fees, draw fees, or unused-commitment fees.
- Collateral: Both can be secured (using equipment, receivables, or a blanket UCC lien). Unsecured options exist but cost more.
Compare example (illustrative)
| Example | Term Loan | Line of Credit (draw) |
|---|---|---|
| Amount | $50,000 | $50,000 (draw) |
| Rate | 7.5% fixed | Prime + 3% (≈8.0%) variable |
| Fees | 2% origination ($1,000) | $200 annual unused fee |
| Repayment | 36 months amortizing | Interest-only + principal as drawn or based on schedule |
Tip: calculate the APR (includes fees) to directly compare total cost. For lines, model expected utilization — an unused line can still cost you via commitment fees.
Application steps
Getting either product typically involves similar documentation, but lenders evaluate slightly different risk profiles depending on product type.
1. Prepare documentation
- Business financial statements (profit & loss, balance sheet)
- Bank statements (3–12 months)
- Business plan or use-of-funds summary
- Tax returns (business and sometimes personal)
- Personal & business credit scores
2. Choose lender type
Options include community banks, national banks, online lenders, credit unions, and alternative finance providers. Community banks may approve lines for relationship customers; online lenders may move faster for term loans.
3. Compare specific quotes
Request rate quotes and term sheets from at least 3 lenders. Ask for the APR, fee schedule, collateral requirements, and any covenants (financial reporting or performance conditions).
4. Negotiate terms
You can often negotiate origination fees, covenants, and even the interest margin (for lines). Offer more collateral or show strong cash flow to reduce pricing.
5. Close and manage
After closing, set up accounting to track draws, repayments, and ensure you meet any reporting or covenant obligations to avoid default risk.
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When to combine both
Many businesses benefit from using both a term loan and a line of credit: use the loan for a capital purchase and keep a line in place for ongoing working capital. This hybrid approach balances predictability with flexibility.
Internal links & next steps
- Small Business Loans: The Complete Guide
- How to Apply for a Business Line of Credit
- Compare Business Lenders: Banks vs Online
Need help choosing? Book a quick consultation
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Disclaimer: This article is informational only and not financial advice. Terms, rates, and lender policies change—verify details with providers before applying.
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