09/01/2026
Term Loan vs. Line of Credit: How Small Business Owners Choose
The short answer: match the financing to the need
Choose a business term loan for a defined, one-time investment and a business line of credit for recurring or uncertain cash needs. A term loan provides a lump sum repaid with interest over a fixed period. A line is revolving, allowing repeated draws and repayments up to the approved limit.
Comparison point Business term loan Business line of credit
Price Published rates range from 6% to 45% APR. Interest applies to the full principal from day one.
Published rates range from 8% to 60% APR, but interest applies only to funds drawn.
Fees Often includes an origination fee and may include late-payment fees.
May include annual maintenance, draw, inactivity and late-payment fees.
Core feature One-time, non-revolving disbursement with a fixed repayment schedule.
Repeated draws, repayments and redraws up to the credit limit; payments can vary with usage.
Funding limit Some online lenders offer $25,000 to $5 million, but this is not a universal market range.
Limits often cap at $250,000, although one cited provider offers lines up to $5 million.
Repayment contract Typical terms run two to 10 years, usually with predictable monthly payments.
Repayment may run six to 24 months through online lenders or two years or more through banks. Payments are generally weekly or monthly and begin after a draw. Some lenders require a zero balance at least once a year.
Cancellation or payoff Standard cancellation and early-payoff rules are not confirmed. Verify prepayment charges, payoff procedures and cancellation terms.
Standard cancellation, renewal and closure rules are not confirmed. Verify renewal conditions, closure rights and treatment of outstanding draws.
Qualification Banks often seek credit scores of at least 670 and about $200,000 in annual revenue. Detailed documentation and collateral may be required.
Some lenders accept scores as low as 600, but requirements vary. Unsecured lines can have stricter standards and lower limits.
Collateral More often secured, particularly for larger amounts or longer terms, potentially with business property or equipment.
May be secured or unsecured; unsecured lines generally have stricter requirements and lower limits.
Best fit A large, planned purchase with a known cost and a preference for predictable payments.
Short-term or recurring working-capital needs when the amount and timing of borrowing may change.
