Commercial Line of Credit vs. Term Loan: Which Is Right for You?
A commercial line of credit and a term loan both provide business financing, but they are structured differently for different purposes. A line of credit is revolving and suited for ongoing, variable needs. A term loan provides a lump sum for a specific purpose and is repaid on a fixed schedule. Choosing the wrong structure can cost money or leave you without access to capital when you need it.
Structure comparison
The fundamental difference is revolving vs. fixed.
| Feature | Line of credit | Term loan |
|---|---|---|
| Disbursement | Draw as needed up to limit | Single lump sum at closing |
| Revolving | Yes — repaid credit restores | No — one-time draw |
| Repayment | Flexible; varies by draws | Fixed monthly schedule |
| Interest | Accrues on outstanding balance only | Accrues on full remaining balance |
| Best for | Ongoing, variable needs | One-time, defined-cost investments |
Cost comparison
For variable, short-duration needs, a line of credit is typically more cost-efficient — you only pay for what you use when you use it. For a single large purchase held for a defined period, a term loan can be competitive and may offer lower rates for stronger collateral.
A business needs $80,000 to cover seasonal inventory, expects to repay in 4 months, and may need the same amount again next season. A revolving line is likely the better choice — the business draws, repays, and reuses without re-applying. If the business instead needs $80,000 to buy a piece of equipment it will use for 5 years, a term loan with monthly payments aligns better with the asset's useful life.
Approval and eligibility
Term loans — especially longer-term or larger ones — often require stronger credit profiles and more documentation than similarly-sized lines of credit. SBA term loans have specific program requirements. Lines of credit, particularly at smaller amounts, are available through online lenders with faster, lighter-documentation processes.
Frequently Asked Questions
- Can I have both a term loan and a line of credit at the same time?
- Yes — businesses often use both. A term loan funds a long-term investment (equipment, real estate); a line of credit handles working capital and seasonal needs. Lenders will review both obligations when underwriting new credit.
- Is a line of credit or a term loan better for a startup?
- Startups often find both difficult to obtain. If one is accessible, a small line of credit (for working capital flexibility) is often more useful than a term loan for a business still establishing its revenue pattern.