Line of Credit vs. Term Loan
Both give you access to capital — but the wrong choice for your use case can cost thousands more than it needs to. The difference comes down to how you plan to use the money.
Line of Credit
Revolving, draw as needed
A credit limit you can draw from, repay, and draw again — as many times as you need within the term. You only pay interest on what you've pulled out. Think of it like a business credit card with a higher limit and lower rate.
Term Loan
Lump sum, fixed repayment
A fixed amount deposited into your account at closing. You repay it on a set monthly schedule over a defined term. Rates are typically lower than a LOC, and the predictable payment structure makes long-term budgeting straightforward.
Cost Comparison Calculator
The LOC cost assumes your average utilization — because you only pay interest on what you draw. Enter your numbers to see which costs less for your situation.
Shared Parameters
Line of Credit
Term Loan
Side-by-Side Comparison
Which Fits Your Situation?
The right choice usually comes down to one question: do you know exactly how much you need and when, or not?
Use a Line of Credit When...
Your cash flow gaps are recurring and variable
Payroll timing, slow-paying customers, irregular revenue months — a revolving line lets you draw exactly what you need each time without reapplying.
You need an emergency buffer
An open LOC costs almost nothing until you draw from it. It's a safety net for unexpected repairs, opportunities, or slow months without the overhead of a term loan you don't need yet.
You're buying inventory at irregular intervals
Seasonal or opportunistic inventory purchases — draw when you buy, repay as inventory sells. The revolving structure matches the cycle.
You're unsure of the exact amount you'll need
If you don't know whether you'll need $30K or $80K, a LOC lets the actual need determine the actual draw — you don't pay interest on headroom you didn't use.
Use a Term Loan When...
You're making a specific, defined capital investment
Expansion, renovation, acquiring a business, building out a location — you know the price and you need all of it. A term loan funds it at a lower rate than a LOC.
You're financing equipment with a long useful life
Match the loan term to the asset's useful life. A 5-year term loan for equipment that generates revenue for 7 years makes financial sense in a way a revolving line doesn't.
You want predictable, budgetable monthly payments
Fixed payment, fixed payoff date. For businesses that plan quarterly or annually, knowing exactly what the debt service will be every month simplifies everything.
You need a larger amount than a LOC can provide
LOCs typically top out at $250K–$500K. Term loans can scale to $5M+ for well-qualified borrowers — often the only viable path for large capital needs.
Consider using both
Many businesses carry a term loan for capital investments and a line of credit for working capital simultaneously. Use the term loan to finance equipment or expansion at lower rates, and keep the LOC open for payroll timing, seasonal swings, and unexpected needs. Lenders evaluate combined debt service, so make sure your revenue can support both.
Not Sure Which Is Right for You?
Get a free estimate and we'll walk through which structure fits your revenue, cash flow cycle, and use case.
Common Questions
Related Tools & Guides
MCA vs. Business Term Loan
How do MCAs and term loans compare on rate, structure, and total cost?
MCA vs. Invoice Factoring
Two flexible options for businesses with strong revenue but limited collateral.
Business Loan Calculator
Run the numbers on a term loan before you apply — payment, total cost, and amortization.