Riverhead TeamWhat to know
Term loans and credit lines solve very different problems. How to decide which one fits your business this quarter — not in theory.
A term loan and a line of credit are both staples of small-business finance, but they solve different problems. Choosing the right one comes down to a simple question: do you need a one-time lump sum, or ongoing access to capital you can tap and repay?
The core difference
A term loan gives you a fixed lump sum up front, repaid in equal installments over a set term. You get all the money at once and start paying it back immediately.
A line of credit gives you a revolving limit you can draw against as needed. You only pay interest on what you've drawn, and as you repay, the available credit replenishes — like a business credit card with better pricing.
When a term loan fits
Term loans are built for defined, one-time investments with a clear return:
- Buying equipment or a vehicle.
- Funding a renovation or build-out.
- Acquiring a business or opening a location.
- Refinancing more expensive debt.
You know the amount, you know the cost, and the payment is predictable for budgeting.
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When a line of credit fits
Lines of credit are built for flexibility and timing:
- Smoothing seasonal cash flow.
- Covering payroll or inventory between receivables.
- Handling unexpected expenses without reapplying.
- Keeping dry powder available for opportunities.
A line of credit is the cheapest insurance against a cash-flow surprise — but only if you have it before you need it. Apply when things are calm.
Cost and structure compared
| Term Loan | Line of Credit | |
|---|---|---|
| Structure | Fixed lump sum, repaid in installments | Revolving limit — draw, repay, redraw |
| Interest | On full balance from day one | Only on the amount drawn |
| Typical range | 7.49%–16.99% APR | 6.75%–13.75% APR (secured to unsecured) |
| Repayment | Fixed monthly payment | Flexible minimum payments |
| Best for | One-time, defined investment | Ongoing or unpredictable needs |
| Qualification | Time in business, credit, cash flow | Similar, often lighter for smaller lines |
How to choose
Ask what the money is for. If it's a single, sizable investment with a known cost, a term loan is usually cheaper and cleaner. If it's recurring, unpredictable, or insurance against timing gaps, a line of credit earns its keep.
Many established businesses keep both: a term loan for the big investment and a line of credit standing by for everything else. If you're not sure which fits your situation — or whether you'd qualify for both — comparing them side by side against your actual cash-flow pattern is the fastest way to decide.