Business Term Loan vs Line of Credit: Which

The rule of thumb: use a term loan to invest in a specific asset or one-time use with a defined ROI. Use a line of credit to manage ongoing, variable working capital needs. A restaurant buying kitchen equipment ($80,000) needs a term loan with 5-year amortization. The same restaurant managing weekly payroll and food cost timing needs a revolving line of credit they can draw and repay monthly.

Factor	Business Term Loan	Business Line of Credit
Structure	Fixed amount, fixed repayment	Revolving limit — draw/repay/redraw
Best Use	One-time investment, equipment	Recurring working capital, cash flow gaps
Cost	8–25% APR (varies)	15–40% APR on drawn balance
Repayment	Fixed monthly payments	Weekly or monthly, interest only on draw
Flexibility	Fixed once funded	Reusable as repaid
Term Length	1–10 years	12 months (often renewable)
Min Credit Score	600–640+	600–620+
Min Time in Business	12 months typically	6–12 months typically
Unused Capacity Fee	N/A	Sometimes (maintenance fee)

Bottom Line Verdict

Match the product to the capital job. Term loans for defined investments. Lines of credit for cash flow management.

Paying for a 5-year piece of equipment with a revolving line of credit means constantly rolling short-term debt for a long-term asset — inefficient and expensive. Paying for monthly working capital with a 5-year term loan means paying interest on capital you don't always need — also inefficient. The right capital structure uses each product for its designed purpose.

Frequently Asked Questions

What is the typical APR for a business term loan vs a line of credit?

Business term loans range from 8–25% APR depending on creditworthiness, lender type, and term length. Business lines of credit typically carry rates of 15–40% APR from online lenders, or 7–15% from banks for highly qualified borrowers. The rate differential is smaller than many assume — the primary distinction is the repayment structure and best use case, not cost alone.

Can I pay off a term loan early without penalty?

Depends on the lender. Traditional bank term loans often have prepayment penalties. SBA loans carry prepayment penalties of 3% in year 1, 2% in year 2, 1% in year 3. Alternative business lenders often have no prepayment penalty, or offer early payoff discounts.

How quickly can I get a business line of credit?

Online lenders like Fundbox can establish a line of credit in 2–3 business days with 3 months of business history. Traditional banks take 1–4 weeks. Once established, draws are same-day.

Can I use both a term loan and a line of credit?

Yes, and this is a common capital structure. A term loan for equipment or real estate and a line of credit for working capital is the textbook approach for businesses with sufficient credit to support both facilities.

Term Loan vs. Line of Credit

Frequently Asked Questions

Apply to Elite Funders Today