Business Line of Credit vs Term Loan: Which Fits Your Business

A business line of credit and a term loan solve different funding problems, and choosing between them usually comes down to whether you have a specific, one-time expense or an ongoing, unpredictable cash flow need.

A term loan provides a lump sum upfront, repaid on a fixed schedule, which suits a specific purchase with a known cost, such as equipment, a buildout, or a one-time inventory order. You know exactly what you are financing and roughly what it will cost in total interest.

A line of credit works more like a business credit card: you have access to a credit limit and can draw funds as needed, paying interest only on what you actually use. This fits ongoing or unpredictable needs, such as smoothing out cash flow gaps between invoices being sent and customers paying them.

Because a line of credit is often used for shorter draw periods and repaid faster, some lenders advertise lower starting APRs than their term loan products, though the total cost still depends heavily on how much of the credit line you actually draw and how quickly you repay it.

A common mistake is using a term loan for a need that is actually recurring, which can mean repeatedly taking out new loans and paying origination costs each time. A line of credit sidesteps that by staying open for draws over an extended period without a new application each time.

For newer businesses, this decision is sometimes simplified by eligibility rather than preference: lenders like Fundbox accept businesses open for as little as three months for a line of credit, while some term loan products expect a longer operating history before approval.