Business Line of Credit vs Term Loan

A business term loan is a lump sum, published ranges $10,000 to $500,000, repaid over six months to five years in fixed weekly or monthly installments. Online funding partners publish APRs of roughly 8% to 45% and fund in one to three business days; origination fees of 1% to 5% are common. The loan is meant for a specific investment with a known cost and a clear payoff: equipment plus installation, a buildout, a hiring push, or refinancing more expensive debt.

A business line of credit is revolving, published ranges $10,000 to $250,000. The lender sets a limit; the business draws when needed, repays, and draws again. Interest (published APRs of roughly 10% to 60%, or a weekly fee on the drawn balance) accrues only on what is outstanding. Lines open in one to three business days and draws are often same day. They are designed for recurring needs: payroll timing, inventory restocks, seasonal dips and the small emergencies that never appear on a budget.

Both products are underwritten on similar files (bank statements, credit around 600 or better, six months to two years in business), and both carry a personal guarantee. The difference is in what the money is for. A term loan's fixed schedule is a feature when the project has a defined return; it is a burden when the need is fluid. A line's flexibility is a feature when needs vary; it is a trap when it becomes a permanent balance at unsecured rates.

Suppose the business needs $40,000. As a 36-month term loan at the midpoint of the published range, the payment is roughly $1,620 a month, total payback about $58,400 and cost of capital around $18,400. At the low end of the range, which established businesses with strong credit can reach, the payment falls to about $1,250 and the cost of capital to roughly $5,100. The payment never changes, and the loan is gone in three years.

The same $40,000 drawn on a line and repaid over twelve months at the midpoint costs about $4,000 a month and roughly $8,000 in interest. Repay it in four months and the interest drops to a fraction of that. The line costs less in total when the business can repay quickly, and the term loan costs less per month when it cannot. The right question is not which is cheaper but how long the money will be outstanding.

At the midpoints: business line of credit costs about $3,999 per month and $47,982 in total payback (35.0% assumed annual interest; 12 months; fees excluded), and business term loan costs about $1,622 per month and $58,403 in total payback (26.5% assumed annual interest; 36 months; fees excluded). Every figure is an estimate using hypothetical assumptions, not a quote.

Term loan guidelines from online funding partners: one to two years in business, $100,000 or more in annual revenue, a credit score of 600 or better (640+ for better pricing), six months of bank statements, the most recent business tax return, and for larger amounts a profit-and-loss and balance sheet. Underwriters check that total debt payments, including the new loan, fit within cash flow.

Line of credit guidelines: six to twelve months in business, $10,000 or more in monthly revenue and a credit score of 600 or better. Bank statements are the primary document; lenders count deposits and negative-balance days. Lines frequently open below the requested limit and grow with clean usage, and lenders can reduce or close lines that sit idle or whose statements weaken.

The classic structure is a term loan sized to the project and a line sized to the operating swing, typically 10% to 25% of annual revenue. Take the term loan first if the project is the priority; its fixed payment becomes part of the cash flow the line lender underwrites. Disclose each to the other lender, and check whether the term lender's UCC filing conflicts with the line lender's.

Some businesses convert a line balance that has become permanent into a term loan. If a line has carried $30,000 for a year, a three-year term loan at a lower fixed rate usually costs less and frees the line for its intended purpose.