How each product works
A business term loan disburses a fixed amount upfront, repaid on a fixed schedule over an agreed term — well suited to a single, identifiable expense such as a piece of equipment or a one-time expansion cost. A business line of credit provides access to a revolving credit limit that can be drawn on, repaid, and redrawn as needed, with interest typically charged only on the amount actually drawn.
Because a line of credit is revolving, it tends to suit recurring or unpredictable short-term needs — smoothing seasonal cash-flow gaps or covering unexpected costs — better than it suits financing a single large, planned purchase.
Comparing the cost structures
A term loan's total interest cost is largely fixed once the amount, rate and term are set, which makes budgeting for it straightforward. A line of credit's cost depends on how much is drawn and for how long, which makes it more flexible but harder to project precisely in advance.
Lines of credit sometimes carry a fee for the unused portion of the limit, in addition to interest on drawn amounts; term loans may carry an origination fee instead. Comparing offers on total expected cost for the specific pattern of use, not just the headline rate, avoids an apples-to-oranges comparison.
Matching the product to the purpose
A term loan generally fits capital expenditures with a clear return timeline, such as equipment, vehicles, or a location buildout. A line of credit generally fits working-capital needs: covering payroll during a slow season, bridging the gap between issuing an invoice and being paid, or handling unplanned expenses.
Some businesses use both: a term loan for planned capital needs and a smaller line of credit held in reserve for short-term flexibility, rather than relying on one product to do both jobs.
Qualification differences
Lines of credit are sometimes easier to qualify for at a modest limit but harder to scale to a large amount than a term loan backed by a specific asset or clear use of funds. Lenders may also reassess and adjust a line of credit's limit periodically based on the business's ongoing financial performance, whereas a term loan's amount is fixed at origination.