Business line of credit vs. loan: Which is right for you?
Your business is poised for growth. All that’s missing? The money to make it happen. Presented by Chase for Business.
- Many businesses that need access to capital for growth use both a term loan for large purchases and a line of credit for managing daily cash flow.
- The primary difference is that a term loan gives you the full amount up front, while a line of credit allows you to draw money as needed over time.
- If you’re deciding between a term loan or a line of credit, the right choice depends on your specific business goals and needs.
Whether you need capital to restock your shop’s inventory for the holiday season or to buy another truck for your growing landscaping business, the good news is that you have other options than using your own savings. This article will walk you through common uses and differences between a business line of credit and a business term loan, so you can assess what your business needs and make an informed decision.
What is a business term loan?
A business term loan is a lump sum of money borrowed from a lender that you repay, with interest, over a set period.
Imagine a small construction company that needs to buy a $95,000 excavator to take on bigger projects. Instead of piecing together cash from savings, the owner applies for a five-year business loan. The loan provides all $95,000 up front, and the company repays it in fixed monthly installments, making it easier to plan around a predictable budget.
Key features:
- Up-front cash: You receive a one-time disbursement of funds.
- Predictable payments: Repayment is typically structured in fixed monthly installments.
- Best for big investments: Common uses include purchasing equipment, expanding facilities or acquiring property.
What is a business line of credit?
A business line of credit is a flexible financing option that gives you access to funds up to a set limit. You can draw only what you need, when you need it.
Consider a retail shop that earns most of its revenue during the holiday season. In the slower summer months, the owner uses a business line of credit to cover payroll and buy inventory. As sales pick up, they pay the balance down, freeing up the line again for future use.
Key features:
- Revolving credit: As you repay what you’ve used, funds become available again.
- Interest on what you use: You’re charged only for the amount you borrow, not the full limit.
- Best for short-term needs: Funds are often used for payroll, rent, inventory or covering seasonal cash-flow gaps.
10 key differences between a business line of credit and a term loan
Although both provide access to capital, they work in very different ways. Here are 10 important differences that might make one a better fit than the other for your business:
1. Repayment schedule
One of the biggest differences between these two financing options is how you pay the money back — and how predictable those payments are.
- Business line of credit: Payments typically vary depending on how much you draw and when. If you borrow $10,000 out of a $50,000 line, you’ll usually make payments only on that drawn $10,000 balance, not your full credit limit. However, it’s important to be aware of other potential fees, like annual or draw fees, and determine whether your lender requires you to bring the balance down to zero at least once a year.
- Business term loan: Repayment follows a set schedule, usually monthly. Payments combine principal and interest, so you know exactly what you owe each period. This can help make budgeting easier for long-term planning.
Quick tip: A line of credit offers flexibility, while a term loan provides predictability.
2. Interest accrual
The way interest builds can impact your total cost of borrowing.
- Business line of credit: Interest accrues only on what you borrow, when you borrow it. If you have a $50,000 limit but use only $5,000, you’re charged interest only on that $5,000. Rates are usually higher than term loans but lower than credit cards.
- Business term loan: Interest accrues on the entire business loan amount from the start, regardless of when you use the funds. For example, a $50,000 loan at 8% interest means you’re paying interest on the full balance from day one.
3. Types of business credit
These products fall into different categories, which changes how they function over time.
- Business line of credit: With revolving credit, as you repay what you’ve borrowed, your available balance replenishes. Similar to a credit card, it’s designed for ongoing access to cash.
- Business term loan: With non-revolving credit, once you’ve spent the loan, that’s it. To borrow more, you’ll need to apply for a new loan.
4. Primary uses
The best option for you depends on what you’re financing.
- Business line of credit: Lines of credit are useful for day-to-day operational expenses, covering payroll, paying rent or stocking up on inventory. It’s also a good safety net for unexpected costs or seasonal slowdowns.
- Business term loan: Commonly used for large, strategic investments such as buying equipment, renovating space or financing an acquisition, business loans are best for projects that will deliver returns over several years.
5. Fund access
How and when you can access funds may also influence your decision.
- Business line of credit: Lines of credit provide ongoing access up to your credit limit. You can draw funds multiple times as needs arise and repay as you go.
- Business term loan: Business loans provide a lump sum all at once, making it better suited for one-time, big-ticket expenses.
6. Application and qualification
The approval process and requirements can differ.
- Business line of credit: Lenders often look for a strong credit history, steady revenue and solid cash flow. Approval amounts tend to be smaller, and requirements can be stricter if you’re applying for an unsecured line.
- Business term loan: These applications usually require a comparable demonstration of strong credit, reliable income and steady cash flow. They typically involve more documentation, such as a business plan or financial projections. Unlike most lines of credit, collateral is often required for larger amounts, but once approved, you can typically borrow more than with a line of credit.
7. Account management and maintenance
Each option comes with its own level of ongoing oversight.
- Business line of credit: Lines of credit may require ongoing account reviews, periodic financial statements and annual renewals. Some lenders also charge fees if the line is unused for too long.
- Business term loan: Business loans require little maintenance after approval. Once you’ve signed the loan agreement, you simply make your scheduled payments.
8. Impact on credit score and reporting
Both options affect your business credit, but in slightly different ways.
- Business line of credit: Regular use and timely repayment can help build your business credit profile. However, carrying high balances or missing payments can negatively impact your score.
- Business term loan: Business loans can demonstrate your ability to handle a large, structured debt. Consistent, on-time payments help improve creditworthiness and may make it easier to qualify for future loans.
9. Fees and costs
Beyond interest, each option comes with potential fees.
- Business line of credit: Common fees include annual maintenance fees, draw fees each time you take money out, inactivity fees if you don’t use it and late-payment fees if you miss a due date.
- Business term loan: These usually involve an origination fee when the loan is issued, plus late-payment fees if you fall behind. Overall, costs are more predictable since fees may be fewer and payments are fixed.
10. Collateral requirements
The type of collateral required (if any) may influence your choice.
- Business line of credit: These can be secured (backed by assets like accounts receivable or equipment) or unsecured. Unsecured lines usually have stricter approval standards and lower amount limits.
- Business term loan: Business loans are more often secured, especially for large loan amounts or long repayment terms. Collateral can include business property, equipment or other significant assets.
Why choose one over the other?
Both financing tools can help your business grow — the right choice simply comes down to your goals.
Choose a business line of credit if:
- You need working capital for ongoing operational expenses
- Your cash flow fluctuates seasonally
- You want a financial safety net for unexpected costs
- You need flexibility and don’t want to commit to a large, fixed payment
Choose a business term loan if:
- You have a specific, large-scale investment in mind
- You prefer predictable, fixed payments
- You need a significant amount of capital up front
- You’re looking to finance long-term growth or assets
FAQs about business loans vs. business line of credit
Business term vs. line of credit: what’s the difference?
A business loan (usually a term loan) provides a lump sum that you repay in installments. A line of credit is revolving and lets you borrow flexibly as needed.
Can I have both a business term loan and a line of credit?
Yes. Many businesses use both — a term loan for large purchases and a line of credit for day-to-day cash-flow management.
Which has lower fees and interest rates?
Term loans often carry lower interest rates, while lines of credit can have more fees but may save you money if you only borrow occasionally.
Is a business line of credit better than a business loan?
Neither is inherently better — it depends on your needs. A line of credit offers flexibility, while a term loan provides predictability.
