Business Line of Credit vs Term Loan: What's the Difference?

A business line of credit and a business term loan are two of the most common forms of business financing. Both provide capital, but they work very differently — and the right choice depends on how you plan to use the funds.

Business Line of Credit

A line of credit is a revolving credit facility. You're approved for a maximum credit limit, and you can draw funds up to that limit at any time. You pay interest only on the amount you've drawn. As you repay, the available credit is replenished — you can draw again.

• Structure: Revolving — draw, repay, draw again.
• Use: Flexible — use for any business purpose (inventory, payroll, gap financing, unexpected expenses).
• Interest: Paid only on the drawn amount, not the full credit limit.
• Term: Typically a 12-month revolving period, renewable.
• Best for: Managing cash flow gaps, seasonal working capital, or having a financial safety net available.

Business Term Loan

A term loan is a lump-sum loan repaid over a set period with fixed or variable payments. You receive the full loan amount at closing and repay it over the term (typically 1–7 years for business loans, up to 25 years for real estate).

• Structure: Lump sum at closing, fixed repayment schedule.
• Use: Specific purpose — equipment purchase, expansion, real estate, debt refinance, business acquisition.
• Interest: Paid on the full loan amount from day one.
• Term: Fixed — 1–7 years for general business, up to 25 years for real estate.
• Best for: Financing a specific purchase or investment with a known cost and expected return.

Key Differences

• Disbursement: Line of credit = draw as needed. Term loan = lump sum at closing.
• Interest: Line of credit = pay only on drawn amount. Term loan = pay on full amount from day one.
• Repayment: Line of credit = revolving, flexible. Term loan = fixed schedule.
• Reusability: Line of credit = draw, repay, draw again. Term loan = one-time disbursement.
• Use case: Line of credit = ongoing working capital. Term loan = specific purchase or investment.

When to Choose a Line of Credit

• You need flexible working capital for cash flow management
• Your revenue is seasonal and you need funds during slow periods
• You want a safety net available for unexpected expenses or opportunities
• You don't know exactly how much you need or when

When to Choose a Term Loan

• You're making a specific purchase (equipment, real estate, acquisition)
• You know exactly how much you need
• You want predictable payments over a set term
• The investment will generate a return that covers the loan payments

Can You Use Both?

Many businesses use both — a term loan for a specific purchase (like equipment) and a line of credit for working capital. The key is to match the financing structure to the use of funds. Read our guide on how business lines of credit work for more detail.

Next Step

If you need business financing, submit your information for a review, or explore our business line of credit or business term loans pages.