Finder is committed to editorial independence. While we receive compensation when you click links to partners, they do not influence our content.

Business term loan vs. line of credit: Which is right for your business?

Choose the best type of financing to give your business the boost it needs.

The starting point to finding the right financing for your small business is to choose the type of financing that will best suit your business’s needs. Here, we take a look at the two main options: A term loan and a line of credit.

Top three advantages of business term loans and lines of credit

Term Loan

Line of Credit

  • Fixed or variable rate of interest
  • No fixed repayment requirements
  • Flexible repayment plans
  • Can request increase in credit limit
  • Discounted rates
  • Withdrawals can be made at any time

First, what are term loans and lines of credit?

Term loans and lines of credit are both types of financing that you can use to help your business cover expenses and grow.

Term loan

Term loans come in lump sums that you repay over a fixed period of time, plus interest and fees. Once you spend all the available funds, you’ll need to apply for a new loan if you need more financing. Many business loans are secured, which means they require some form of collateral — often equipment, real estate or a lien on your assets. You can typically fund unsecured business loans in amounts up to $50,000, while you can find secured loans up to $1.25 million or sometimes higher.

Line of credit

Business lines of credit are often compared to credit cards: You get access to a certain amount of funds which you can draw from as you need. With a business line of credit, you only pay interest on money that you actually use. You typically have to repay at least the minimum amount over a specified number of years, which means you don’t have to make consistent or scheduled repayments.

What are the benefits of term loans vs. lines of credit?

Term loans

  • Fixed or variable rate of interest. Many lenders will let you choose between a loan with a set interest rate and one that fluctuates with the market rate. Variable rates tend to start lower but could increase over the term of the loan.
  • Flexible repayment plans. Some loans offer multiple repayment options to choose exactly how much you pay back and when. Depending on the lender, you could possibly pay your loan back with monthly instalments, weekly or bi-weekly instalments or daily payments.

Lines of credit

  • Only pay interest on what you use. Rather than having to repay a lump sum, you have the freedom to spend only what you need and pay interest on the borrowed amount.
  • Only pay the minimum. Most lenders require that you only pay the minimum each month – which can be a helpful feature if you’re short on cash one month.
  • Option to renew. While lines of credit come with terms, they’re easily renewable. Many businesses have lines of credit with a lender for years, which they continually renew.
  • Make withdrawals at any time. You’re able to withdraw up to a daily or set limit at any time, making it a convenient option for business owners who have ongoing expenses or want to be prepared for large unexpected expenses.

What are the drawbacks?

Term loans

  • Can’t help with cash flow. Term loans aren’t great for covering unexpected gaps in your cash flow, since you’ll typically have to calculate exactly how much you need to borrow when you apply.
  • Inflexible. With a term loan, repayments start immediately and you’re on the hook for the amount you borrow – even if you don’t end up using all of it.
  • It takes effort to get more financing. If you still need funds, you’ll have to go through the application process all over again, rather than just renewing your loan.
  • Fees. Many lenders charge a one-time origination fee that can cost anywhere from 1-7% of your total loan amount, plus other possible fees like prepayment.

Lines of credit

  • Not great for large purchases. While it’s possible to max out your credit limit, you won’t have any other funds available to cover expenses until you’ve paid back some of the borrowed funds.
  • Unpredictable repayments. Your monthly repayments go up each time you draw from your credit line. If you don’t know how much you’re going to be drawing or you only pay the minimum some months, it can be difficult to calculate a budget for loan repayments.
  • Fees. Some lenders charge a fee to maintain your account or charge you a fee every time you want to draw funds from your credit line.

What types of costs can I cover with term loans and lines of credit?

Term loan

Term loans are often best for large, one-time purchases or specific purposes. You might want to use a term loan for:

  • Equipment
  • Real estate
  • Vehicles
  • Business acquisition

Compare business term loans

Line of credit

Lines of credit are usually better for covering smaller, short-term expenses that are difficult to predict. These include:

  • Overhead costs during an off-season
  • Restocking inventory
  • Payroll
  • Emergency expenses

Compare business lines of credit

Compare business loans

Name Product Interest Rate Loan Amount Loan Term Minimum Revenue Minimum Time in Business Loans Offered
SharpShooter Funding Business Loan
Prime pricing from 9.00%
$500 - $250,000
6 - 120 months
$10,000 /month
100 days
Unsecured Term, Merchant Cash Advance, Invoice Factoring
To be eligible, you must have been in business for at least 100 days with a minimum of $10,000 in monthly deposits.

SharpShooter provides capital to small businesses that are underserved by banks and credit unions. It measures overall business health and potential rather than focusing strictly on traditional metrics. Fill out a simple application and get pre-approved in minutes. Receive your funds within 24 hours.
Swoop Funding Business Loan
4.00% - 25.00%
$1,000 - $5,000,000
3 - 60 months
$10,000 /month
24 months
Term, MCA, LOC & more
To be eligible, you must have been in business for at least 24 months and have a minimum of $100,000 in annual revenue.

Swoop partners with banks and alternative lenders to match your business with the right funding options. Register for free and browse your offers without affecting your credit score.
OnDeck Business Loan
8.00% – 29.00%
$5,000 - $300,000
6 - 18 months
$10,000 /month
6 months
Secured Term, Line of Credit, Merchant Cash Advance
To be eligible, you must have been in business for at least 6 months with a minimum monthly revenue of $10,000.

OnDeck offers fast and simple financing. Apply in less than 10 minutes with your basic business information and see your loan offers without hurting your credit score. Get approved within 1 business day, and choose your term, amount and payback schedule once approved.
Loans Canada Business Loan
Prime Pricing from 9.00%
$2,000 - $350,000
3 - 60 months
$4,166 /month
100 days
Unsecured Term
To be eligible, you must have been in business for at least 100 days, have a credit score of 410+ and show a minimum of $4,166 in monthly deposits ($50,000/year).

Loans Canada connects Canadian small business owners to lenders offering financing up to $350,000. Complete one simple online application and get matched with your loan options.

Compare up to 4 providers

How to get business financing

The processes involved in finding approval for a term loan are simple. The lender will want historical evidence of successful cash flow and assurance of collateral, should your company be unable to repay the loan.

The prerequisites for a line of credit are similar but more stringent. Along with a contract of repayment terms, lenders will provide a list of rules that must be kept in order to continue with the line of credit. These rules will usually involve the company maintaining a certain net worth and not dropping below an agreed level of debt.

Compare business loans to more financing options

Business loan vs. Business credit card
Business loan vs. Angel investor
Business loan vs. Personal loan
Business loan vs. Home equity loan

More guides on Finder

Ask an Expert

You must be logged in to post a comment.

Go to site