When it comes to financing your business, not all loans are created equal. Two of the most common funding options available today are business lines of credit and term loans. Both can provide valuable capital — but they work differently, and choosing the wrong one could cost your company time, money, and flexibility.
This guide explains how each works, their advantages and disadvantages, and how to decide which is right for your business in 2025.
Understanding the Basics
What Is a Business Line of Credit?
A business line of credit is a flexible funding tool. Instead of receiving a lump sum, you’re approved for a credit limit (for example, $50,000). You can borrow as needed, repay, and borrow again — similar to a credit card but usually with higher limits and lower rates.
Key features:
- Revolving credit: reuse funds as you repay
- Interest applies only to the amount you draw
- Often unsecured (no collateral) but may require a personal guarantee
What Is a Term Loan?
A term loan provides a lump sum of cash upfront, which you repay in fixed installments over a set period (the “term”). It’s best for large, one-time investments or projects with predictable costs.
Key features:
- Fixed loan amount and repayment schedule
- Can be secured or unsecured
- Interest is charged on the full amount from day one
Business Line of Credit: Pros and Cons
Pros
- Flexibility
You can draw only what you need, when you need it — perfect for managing cash-flow ups and downs. - Interest Savings
Pay interest only on the funds you use, not the entire approved limit. - Quick Access
Once set up, drawing funds is usually instant, making it ideal for emergencies or opportunities. - Builds Business Credit
Responsible use can strengthen your company’s credit profile, improving future borrowing options.
Cons
- Variable Rates
Many lines of credit have floating interest rates, so your cost of borrowing can increase unexpectedly. - Annual or Draw Fees
Some lenders charge maintenance or transaction fees, even if you don’t use the credit. - Temptation to Over-Borrow
Easy access can lead to unnecessary debt if not managed carefully. - Lower Limits
Typically smaller funding amounts compared to term loans, limiting use for big projects.
Term Loan: Pros and Cons
Pros
- Predictable Payments
Fixed interest rates and set repayment schedules make budgeting easier. - Higher Funding Amounts
Lenders are often willing to offer more significant sums, especially for established businesses. - Longer Terms
Repayment periods can span years, making large investments more manageable. - Lower Interest (When Secured)
Collateral-backed term loans often come with competitive rates.
Cons
- Less Flexibility
Once the loan is funded, you can’t adjust it easily. Need more money? You’ll have to reapply. - Interest on the Full Amount
You pay interest on the entire loan from day one, even if you don’t use all the funds immediately. - Stricter Approval
Lenders often require solid credit, collateral, and proof of repayment ability. - Potential Prepayment Penalties
Some loans charge fees if you pay them off early.
Side-by-Side Comparison
| Feature | Business Line of Credit | Term Loan |
|---|---|---|
| Funding Type | Revolving — borrow, repay, borrow again | Lump sum — fixed repayment schedule |
| Flexibility | High — use as needed | Low — fixed amount, fixed purpose |
| Interest Charged | Only on funds drawn | On entire loan amount |
| Typical Loan Amounts | $10,000–$500,000 | $25,000–$5 million |
| Repayment Terms | Ongoing or short-term | Fixed — months to years |
| Best For | Cash-flow management, short-term needs | Large, one-time investments |
When to Choose a Business Line of Credit
A line of credit makes sense when:
- Your business experiences seasonal fluctuations in cash flow.
- You want a financial safety net for unexpected expenses or emergencies.
- You need to cover operational gaps, such as supplier payments before customer invoices clear.
- You want ongoing access to capital without reapplying every time.
Examples:
- A retailer preparing for a busy holiday season needs extra inventory now, knowing revenue will come in later.
- A contractor waiting for a client payment wants to pay staff and vendors on time.
When to Choose a Term Loan
A term loan is ideal when:
- You have a specific, large purchase or project to fund.
- You need to expand operations, such as opening a new location or buying heavy equipment.
- You want predictable costs for easier financial planning.
- You’re consolidating debt into one manageable payment.
Examples:
- A restaurant owner wants to purchase a second location.
- A manufacturing company needs to invest in new machinery to increase capacity.
Hybrid Strategies: Using Both
Many businesses use a combination of both:
- Term loan for big, strategic investments.
- Line of credit for day-to-day flexibility.
This dual approach balances stability and agility, ensuring you’re prepared for both planned growth and unexpected challenges.
Tips for Getting Approved
Whether you’re applying for a line of credit, a term loan, or both, lenders typically consider:
- Credit scores (personal and business)
- Revenue and profitability
- Time in business
- Collateral (if required)
- Debt-to-income or debt-service coverage ratios
To improve your chances:
- Keep financial statements updated and accurate.
- Pay down existing debt before applying.
- Clearly explain how you’ll use the funds and repay them.
- Build relationships with lenders — banks often favor customers they already know.
Final Thoughts
Both business lines of credit and term loans can be powerful financial tools — when matched to the right need. A line of credit offers flexibility and quick access to cash for everyday fluctuations. A term loan provides stable, predictable funding for major investments.
The best choice depends on your cash-flow patterns, project goals, and risk tolerance. For many businesses, using both strategically is the smartest way to stay nimble while funding growth responsibly.