Two of the most common funding tools — a business line of credit and a term loan — look similar on the surface but solve genuinely different problems. Choosing the wrong one can cost you in interest, flexibility, or both. Here's a plain-English guide to telling them apart.

The short version

A line of credit is a flexible, revolving pool of money you can draw from again and again, paying interest only on what you use. A term loan is a one-time lump sum you repay on a fixed schedule. Lines of credit are built for ongoing, unpredictable needs; term loans are built for specific, planned investments.

Match the structure of the financing to the shape of the expense. Recurring and uncertain? A line. One-time and defined? A loan.

How a line of credit works

When you're approved for a line of credit, you receive a credit limit — say $100,000. You can draw any amount up to that limit, whenever you need it. You pay interest only on the balance you've actually drawn, and as you repay, your available credit replenishes.

  • Best for: covering payroll during a slow stretch, buying inventory ahead of a busy season, or jumping on a time-sensitive opportunity.
  • Watch for: the temptation to treat it as permanent capital. A line is a bridge, not a foundation.

How a term loan works

A term loan delivers a single lump sum up front, which you repay in equal installments over a set period — anywhere from a few months to several years. The rate and payment are typically fixed, so you know your exact cost from day one.

  • Best for: a defined purchase or project — new equipment, a renovation, an acquisition, or refinancing more expensive debt.
  • Watch for: borrowing more than the project requires. You pay interest on the full amount whether you use it or not.

A quick test: If you can name the single thing you're buying and its price, a term loan probably fits. If you're managing a moving target — cash flow, opportunities, seasonal swings — a line of credit gives you room to maneuver.

Comparing the costs

Lines of credit often carry slightly higher rates than comparable term loans, reflecting their flexibility. But because you pay interest only on what you draw, a line can be cheaper in practice if you use it lightly and repay quickly. A term loan's predictability, meanwhile, makes budgeting simpler and can carry a lower headline rate for well-qualified borrowers.

Three questions to ask yourself

  1. Is this expense a one-time event or an ongoing need?
  2. Do I know the exact amount, or will it vary?
  3. Would predictable fixed payments help me plan, or do I need flexibility more?

Key takeaways

  • A line of credit is revolving and flexible — pay interest only on what you draw.
  • A term loan is a fixed lump sum with predictable payments — ideal for defined projects.
  • Match the funding structure to the shape of the expense.
  • When in doubt, an advisor can model both against your real numbers.

The bottom line

Neither product is universally "better" — they're different tools for different jobs. Many growing businesses end up using both: a line for day-to-day flexibility and term loans for major investments. If you'd like help deciding, our advisors will walk through your cash flow with you, free of charge and with no obligation.