Term loans and lines of credit are both popular business financing products — but they serve very different purposes. Understanding which fits your situation prevents costly mismatches.
How a Term Loan Works
You receive a fixed lump sum repaid in regular installments over a defined period. Once repaid, the facility closes. You know the exact cost, exact payment, and exact payoff date from day one.
How a Line of Credit Works
A credit limit you draw from as needed. Repay, and the available credit is restored. You only pay fees or interest on drawn amounts — not the full limit.
When to Use a Term Loan
- Purchasing specific equipment
- Funding a location expansion
- Acquiring a business
- Financing a major renovation
Use a term loan when you have a defined capital need with a clear purpose and ROI timeline.
When to Use a Line of Credit
- Managing seasonal cash flow gaps
- Covering payroll during slow periods
- Handling unexpected expenses
- Capturing time-sensitive opportunities
Use a line of credit for ongoing capital management rather than a single defined purpose.
Can You Have Both?
Yes — and many businesses do. A term loan for a specific project plus an open line of credit for ongoing cash flow management is a powerful and common combination. Establish both before you need them.