Business line of credit vs term loan: what’s the difference?

A lot of business owners hear about business lines of credit and term loans as if they are the same thing.

They are not.

A term loan usually means you receive a fixed amount upfront and repay it over a set period of time.

A business line of credit usually gives you access to a credit limit that you can draw from when needed. You may only pay interest or fees on the amount you use, depending on the structure.

A line of credit may be useful for:

• seasonal cash flow gaps;
• inventory purchases;
• payroll timing issues;
• emergency expenses;
• short-term working capital;
• recurring but unpredictable business needs.

A term loan may be better for:

• a specific project;
• equipment purchase;
• expansion;
• renovation;
• hiring;
• consolidating certain obligations;
• a planned investment with clear use of funds.

The key difference is flexibility.

A line of credit can be helpful when you do not know exactly how much capital you will need or when you will need it. A term loan can be better when you know the exact amount and purpose.

Before choosing either one, compare:

• total cost;
• repayment frequency;
• draw fees;
• unused line fees;
• renewal terms;
• credit score requirements;
• personal guarantee;
• how quickly payments start;
• whether the lender can reduce or freeze the line.

A line of credit is not automatically better than a term loan. It depends on the business problem you are trying to solve.

For business owners here: would you rather have a fixed loan amount or access to a flexible credit line?