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Term Loan vs. Line of Credit:
Which Is Right for Your Business?
Term loans and lines of credit are the two most common business financing tools, but they serve fundamentally different needs. One gives you a lump sum with predictable payments. The other gives you flexible, revolving credit you draw as needed. Here is how to choose.
Ranges across NBC lender network.
Summary
- A term loan provides a lump sum with fixed repayment; a line of credit provides revolving credit you draw and repay as needed.
- Term loans are best for one-time, known expenses with predictable repayment. Lines of credit are best for ongoing or unpredictable cash flow needs.
- Term loans generally have lower interest rates; lines of credit may cost less in total interest if used intermittently.
- Both can fund in 24-72 hours through online lenders. SBA versions of either take 60-90 days but cost significantly less.
- Many businesses use both: a term loan for a specific purchase and a line of credit for ongoing working capital.
Advertiser Disclosure: Manu Business Lending is a paid referral partner of National Business Capital. Financing is provided by NBC and its lender network, not by Manu. All loans subject to lender approval, terms, and conditions.
Side-by-Side Comparison
| Feature | Term Loan | Line of Credit |
|---|---|---|
| Disbursement | Lump sum, one-time | Revolving; draw as needed |
| Interest | Paid on full amount from day one | Paid only on drawn balance |
| Repayment | Fixed schedule (weekly/monthly) | Flexible; repay and redraw |
| Rate type | Usually fixed | Usually variable |
| Typical term | 6 months to 10 years | Revolving (12-month review typical) |
| Best for | One-time, known expense | Ongoing, unpredictable needs |
| Cost | Lower rate, higher total if unused | Higher rate, lower total if used sparingly |
| Reborrowing | Requires new application | Automatic as you repay |
When to Choose a Term Loan
Choose a term loan when you know exactly how much you need and what you will use it for:
- Equipment purchase: You need $80,000 for a specific machine. A term loan gives you the full amount upfront with predictable monthly payments.
- Business expansion: You are opening a new location and need $200,000 for build-out and inventory. A term loan funds the project with a clear repayment timeline.
- Debt consolidation: You have multiple high-interest loans and want to consolidate into one payment at a lower rate.
- Large one-time expense: You need to pay an annual insurance premium, buy out a partner, or purchase a vehicle.
The advantage of a term loan is predictability: you know the amount, the rate, the payment, and the payoff date from day one. This makes budgeting straightforward.
When to Choose a Line of Credit
Choose a line of credit when your financing needs are ongoing or unpredictable:
- Seasonal cash flow: Your revenue swings seasonally. A line of credit lets you draw during slow months and repay during peak months, year after year.
- Inventory purchasing: You buy stock before peak season. Draw to pay suppliers, repay as inventory sells.
- Bridging client payments: You have net-30 or net-60 clients. Draw to cover operating costs, repay when the client pays.
- Emergency fund: You want a standing credit facility available for unexpected expenses, without paying interest until you need it.
The advantage of a line of credit is flexibility: you only pay for what you use, and the credit becomes available again as you repay. This makes it ideal for recurring or variable needs.
Cost Comparison
| Factor | Term Loan | Line of Credit |
|---|---|---|
| Typical APR | 6-40% (depends on lender type) | 8-45% (typically 2-5% higher than equivalent term loan) |
| Interest paid | On full amount for full term | Only on drawn balance; zero if unused |
| Fees | Origination fee (1-5% typical) | Draw fees, maintenance fees, or inactivity fees may apply |
| Total cost scenario | $50K loan at 15% for 2 years = ~$7,800 interest | $50K LOC, avg $20K drawn at 18% for 2 years = ~$3,600 interest |
Using Both Together
Many businesses use both products strategically:
- Term loan for the big, one-time purchase (equipment, expansion, acquisition)
- Line of credit for ongoing working capital (payroll, inventory, seasonal gaps)
This combination gives you the predictability of a term loan for known expenses and the flexibility of a line of credit for variable needs. Through the NBC network, one application reaches 75+ lenders across both product types, so you can compare offers for each simultaneously.
Explore related options: SBA loans, equipment financing, short-term business loans, or contractor financing.
One application. 75+ lenders. No hard credit pull to pre-qualify.
Compare Loan and Credit OptionsFrequently Asked Questions
What is the difference between a term loan and a line of credit?
A term loan provides a lump-sum disbursement with fixed repayment over a set period. A line of credit is revolving credit you can draw from and repay repeatedly, paying interest only on the drawn balance. Term loans are predictable; lines of credit are flexible.
Which is cheaper: a term loan or a line of credit?
Term loans generally have lower interest rates because the lender has certainty about how much you will borrow and for how long. Lines of credit have higher rates because the lender must keep capital available. However, if you only need funds intermittently, a line of credit may cost less in total interest because you only pay on what you draw.
When should I choose a term loan?
Choose a term loan when you have a one-time, known expense (equipment purchase, expansion, debt consolidation) and want predictable monthly payments. Term loans are best when you know exactly how much you need and when you will need it.
When should I choose a line of credit?
Choose a line of credit when your financing needs are ongoing or unpredictable (seasonal cash flow, inventory purchasing, bridging variable payment cycles). Lines of credit are best when you need flexibility and do not want to pay interest on funds you are not actively using.
Can I have both a term loan and a line of credit?
Yes. Many businesses use both: a term loan for a specific purchase (equipment, vehicle) and a line of credit for ongoing working capital needs. Through the NBC network, one application reaches 75+ lenders across both product types.
How fast can I get a term loan vs. a line of credit?
Both can fund quickly through online and alternative lenders. Term loans: 24-72 hours. Lines of credit: 1-5 days. SBA versions of either take 60-90 days. Through the NBC network, both types can be explored with one application and no hard credit pull.
Do term loans or lines of credit require collateral?
It depends on the lender and amount. Online term loans and lines of credit under $100K are often unsecured. Bank and SBA versions typically require business assets as collateral. Equipment term loans are secured by the equipment itself. Personal guarantees are common for both types.
Sources
- U.S. Small Business Administration: sba.gov/funding-programs/loans
- Federal Reserve, Small Business Credit Survey: fedsmallbusiness.org
- U.S. Chamber of Commerce: uschamber.com/co
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This article was last reviewed July 10, 2026 by Malik Samara, Managing Partner. Our editorial team reviews and updates content on a rolling basis. Learn about our editorial standards.
Manu Business Lending is a paid referral partner of National Business Capital. Financing is provided by NBC and its lender network, not by Manu, and all loans are subject to lender approval, terms, and conditions. The information on this page is for educational purposes and does not constitute financial advice. Consult a licensed financial advisor for guidance specific to your business.