Term loans give you a lump sum upfront with fixed payments over a set period. Lines of credit give you a revolving pool you can draw from as needed, paying interest only on what you use. Term loans are better for one-time purchases (equipment, expansion, acquisition). Lines of credit are better for ongoing cash flow gaps (payroll timing, seasonal inventory, emergency reserves). Many growing businesses carry both.
| Feature | Business Term Loan | Business Line of Credit |
|---|---|---|
| Funding structure | Lump sum at closing | Revolving credit limit |
| Interest paid on | Full loan balance | Only what you draw |
| Repayment | Fixed monthly payments | Variable, minimum payment on balance |
| Best use | Equipment, expansion, acquisitions | Cash flow gaps, seasonal needs |
| Loan amount | $5K to $5M+ | $5K to $1M typical |
| Typical APR | 7% to 35% | Prime + 3 to 12% |
| Term length | 1 to 25 years | Open-ended, renewed annually |
Sources: lender published rate tables, SBA program guidelines, and industry data as of June 2026. Rates and qualification criteria change frequently. Confirm with each lender before applying.
The most common mistake is using a term loan when a line of credit fits better. Borrowers take a 5-year, $100K term loan for a $30K cash flow gap, then carry interest on the unused $70K. Or worse: they use a line of credit to fund a 7-year equipment purchase, then face a variable rate that doubles their payment in year 2. Match the loan structure to the use case. Many growing businesses end up carrying a term loan for the major purchase and a line of credit for cash flow, because each product solves a different problem.
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