Introduction
Choosing the right type of business financing can feel overwhelming, especially when faced with two common options: the business line of credit and the term loan.
Both offer unique benefits, but each serves a different purpose. In this article, we’ll break down the key differences to help you decide which one is the best fit for your business in 2025.
💳 What is a Business Line of Credit?
A business line of credit (LOC) gives you access to a set amount of money that you can draw from as needed—similar to a credit card.
✅ Best for:
- Managing cash flow
- Covering short-term expenses
- Seasonal businesses
- Emergency funds
💡 Features:
- Revolving credit (reusable after repayment)
- Pay interest only on what you use
- Flexible repayment terms
- Typically lower amounts than term loans
💵 What is a Term Loan?
A term loan provides a lump sum of money upfront, which you repay over a set period with fixed or variable interest.
✅ Best for:
- Major purchases
- Business expansion
- Equipment or real estate
- Long-term investments
💡 Features:
- Fixed repayment schedule
- Interest on the full amount
- Higher loan amounts possible
- May require collateral
🆚 Line of Credit vs Term Loan: Quick Comparison
| Feature | Line of Credit | Term Loan |
|---|---|---|
| Funds Access | As needed | Lump sum |
| Interest Charged On | Amount used | Full loan amount |
| Repayment | Flexible | Fixed monthly payments |
| Reusability | Revolving | One-time |
| Ideal For | Short-term needs | Long-term projects |
| Approval Time | Fast | Slightly longer |
| Collateral Required | Sometimes | Often |
💼 When to Use a Line of Credit
Choose a business LOC if you:
- Have frequent short-term cash gaps
- Need to pay for inventory, payroll, or emergencies
- Want on-demand access to funds
- Don’t need a large loan all at once
🏗️ When to Use a Term Loan
A term loan makes more sense when you:
- Are investing in long-term assets
- Need a large lump sum
- Can commit to regular monthly payments
- Want predictable repayment over time
💬 Real-World Example:
Sarah’s Bakery uses a line of credit to manage seasonal ingredient costs.
Mike’s Tech Startup takes a term loan to purchase expensive hardware and fund expansion.
Both are right—depending on their business needs.
🧠 Pro Tip:
Some businesses use both:
- A term loan for expansion
- A line of credit for daily operations
This combo keeps you funded for the long haul and prepared for short-term surprises.
🔗 Internal Linking Suggestions:
- Link to Article #6 (secured vs unsecured loan)
- Link to a business funding calculator
- Recommend your “Get Prequalified” page if available
✅ Final Thoughts
Understanding the difference between a business line of credit and a term loan helps you make smarter decisions. If flexibility is your top priority, a LOC may be perfect. But if you need serious funding with structure, a term loan might be the better move.
Always choose based on your goals, cash flow, and repayment comfort.