The Quick Answer
Line of credit = recurring needs. Payroll, inventory, seasonal gaps — you draw, repay, redraw. Interest only on what you use.
Term loan = one-time investments. Equipment, expansion, acquisition, refinance. Lump sum, fixed payments, done.
Most business owners don't choose wrong — they choose both at different times. The businesses that optimize capital structure use a term loan for the big purchase and a line of credit for the daily grind.
Side-by-Side Comparison
| Feature | Business Line of Credit | Term Loan |
|---|---|---|
| Structure | Revolving — draw, repay, redraw | Installment — lump sum, fixed payments |
| Interest | Only on drawn amount | On full principal from day one |
| Rate Type | Variable (Prime + 1–5%) | Fixed or variable (7–25% APR) |
| Payments | Interest-only or min % of balance | Fixed principal + interest |
| Term | Revolving (12–24 mo renewal) | 1–7 years (up to 25 for RE) |
| Amounts | $10K–$500K | $25K–$2M+ |
| Speed | 3–10 days | 5–15 days |
| Credit Score | 600+ alt / 660+ bank | 650+ alt / 680+ bank |
| Collateral | Often unsecured / blanket lien | Often secured / specific asset |
| Best For | Recurring: payroll, inventory, seasonal | One-time: equipment, expansion, acquisition |
The Core Difference: Revolving vs Installment
Line of Credit = Revolving Credit
Think of it like a credit card for your business — but with higher limits, lower rates, and no swipe fees.
- Approved for a maximum limit (e.g., $250K)
- Draw what you need, when you need it
- Interest only on the amount drawn
- Repay → credit becomes available again
- Typically renews annually (subject to review)
Interest math: Draw $50K on a $250K line at Prime + 3% (8.5%). You pay interest on $50K only. The other $200K costs you nothing until you draw it.
Term Loan = Installment Credit
Traditional loan structure. You get the full amount upfront and repay in equal installments.
- Receive full loan amount upfront (e.g., $500K)
- Fixed monthly payments (principal + interest)
- Interest on full principal from day one
- Fixed maturity date (e.g., 5 years)
- Prepayment may have penalties
Interest math: $500K at 9% fixed for 5 years = $10,379/month. Total interest: $122,740. You pay interest on the full $500K from month one.
When to Choose a Line of Credit
Recurring, unpredictable, or seasonal needs.
Perfect for:
- Payroll gaps: Revenue lags 30–60 days, payroll is every 2 weeks
- Inventory purchases: Buy before peak season, repay after sales
- Seasonal gaps: Construction winter slowdown, retail post-holiday dip
- Emergency buffer: Equipment repair, unexpected tax bill, vendor emergency
- Vendor discounts: Take 2/10 net 30 discounts when cash is tight
Real example:
A $3M/year landscaping company has 80% of revenue April–October. They use a $200K line of credit November–March for payroll and equipment maintenance. Draw $150K in January, repay $150K in April when contracts restart. Interest only on what's drawn, 3 months a year.
Our take: If you have a predictable annual cycle with 2–4 months of negative cash flow, a line of credit is the most efficient capital. You pay interest only during the gap months.
When to Choose a Term Loan
One-time, defined-purpose investments with predictable ROI.
Perfect for:
- Equipment purchases: Trucks, machinery, ovens, medical equipment
- Real estate: Purchase, renovation, expansion (also see SBA 504)
- Business acquisition: Buy a competitor, partner buyout
- Debt refinancing: Consolidate high-rate MCA/credit card debt
- Major renovation: Restaurant buildout, facility expansion
Real example:
A $5M/year manufacturing company buys a $750K CNC machine. 7-year term loan at 8.5% fixed = $11,700/month. The machine adds $25K/month in capacity. Net gain: $13,300/month. Loan paid off in 7 years; machine runs 15+ years.
Our take: If the asset generates revenue that exceeds the payment, a term loan is an investment — not a cost. Match the loan term to the asset's useful life (7 years for a 10-year machine).
The "Both" Strategy — How Smart Businesses Use Both
Most established businesses don't choose — they layer.
The layered capital structure:
- SBA 7(a) or 504: Real estate, major equipment, acquisition (lowest rate, longest term)
- Term loan: Major equipment, acquisition, refinancing (5–7 years)
- Line of credit: Working capital, payroll, inventory, seasonal (revolving)
- Revenue-based/alternative: Seasonal gaps, growth spurts, credit challenges (supplement)
Real example — $8M/year food distributor:
- SBA 504: $2M for warehouse purchase (25 yr, 6.25%)
- Term loan: $600K for 3 delivery trucks (5 yr, 7.5%)
- Line of credit: $500K for inventory/seasonal (revolving, Prime + 2%)
- Revenue-based: $300K for holiday inventory build (repay 8% of revenue)
Total capital: $3.9M. Blended rate: ~6.8%. Each layer matches the asset's life and cash flow pattern.
Our take: Don't force one product to do everything. The businesses with the lowest cost of capital match each need to the right product.
Qualification Comparison
| Requirement | Line of Credit | Term Loan |
|---|---|---|
| Credit Score (Bank) | 660+ | 680+ |
| Credit Score (Alternative) | 600+ | 650+ |
| Time in Business | 1+ year | 1–2 years |
| Annual Revenue | $250K+ | $250K+ |
| Profitability | Preferred | Required |
| Collateral | Often unsecured / blanket lien | Often secured / specific asset |
| DSCR Requirement | 1.15x+ | 1.25x+ |
Our take: Lines of credit are slightly easier to qualify for but require ongoing financial reporting (quarterly/annual reviews). Term loans are "one and done" — approve once, pay on schedule.
Cost Comparison: The Hidden Math
Scenario: $250K need
Option A: Line of Credit
- Limit: $250K
- Rate: Prime + 3% (8.5% variable)
- Draw: $150K average over year
- Annual interest: $12,750 (on $150K avg)
- Fees: $500 annual fee + 0.25% unused line fee ($250)
- Total Year 1 cost: ~$13,500
Option B: Term Loan
- Amount: $250K
- Rate: 9.5% fixed
- Term: 5 years
- Monthly payment: $5,250
- Annual interest Year 1: ~$22,500
- Fees: $2,500 origination
- Total Year 1 cost: ~$25,000
The insight: If you need the full $250K for the full year, the term loan costs ~2x more in Year 1. But the line of credit rate is variable — if Prime rises 2%, your cost jumps $3,000/year. The term loan locks the rate.
Our take: If you need the capital continuously for 3+ years → term loan. If you need it intermittently or for < 2 years → line of credit. The breakeven is typically 18–24 months of continuous full draw.
Decision Framework: 5 Questions
- Is the need recurring or one-time? Recurring → Line. One-time → Term.
- Do you know the exact amount needed? Exact → Term. Variable/unknown → Line.
- Can you repay in < 2 years? Yes → Line (lower total cost). No → Term (predictable payments).
- Is the asset specific and long-lived? Yes → Term (or equipment financing). No → Line.
- Do you want rate certainty? Yes → Term (fixed). Comfortable with variable → Line.
Still unsure? Most businesses in the $1M–$20M revenue range benefit from having both. Start with a line of credit for flexibility, add a term loan when a specific investment opportunity appears.
When Equipment Financing Beats Both
If the purchase is equipment, vehicles, or machinery — equipment financing often beats both.
- Lower rates: 5–15% (asset-secured)
- 100% financing: No down payment often required
- Matched terms: 2–7 years matched to equipment life
- Tax benefits: Section 179 deduction + bonus depreciation
- Preserves credit capacity: Doesn't touch your line of credit or term loan capacity
Our take: Never use a line of credit or unsecured term loan for equipment if equipment financing is available. The asset secures the loan = lower rate, better terms, tax advantages. Save your unsecured capacity for true working capital needs.
When SBA Beats Both
For amounts > $350K with 2+ years history and 680+ credit:
- SBA 7(a): Best of both worlds — term loan rates (Prime + 2.25%), 10-year terms, general use
- SBA 504: Real estate/equipment only — fixed rate, 25-year term, 10% down
- SBA Express: Line of credit option up to $500K, 36-hour decision
Our take: If you qualify for SBA, it's almost always the best rate/term combination. We help you navigate the paperwork — it's worth the 60-day wait for 3–4% rate savings over 10 years.
Your Decision Checklist
| Question | → Line of Credit | → Term Loan |
|---|---|---|
| Recurring or one-time need? | Recurring / variable | One-time / defined |
| Know exact amount needed? | No / variable | Yes, exact |
| Repay in < 2 years? | Yes | No (3+ years) |
| Specific long-lived asset? | No | Yes (equipment, RE) |
| Need rate certainty? | Comfortable with variable | Need fixed |
| Need full amount upfront? | No | Yes |
Count your checks: 5+ for Line → Line of Credit. 5+ for Term → Term Loan. Split → Consider both.
Your Next Steps
- Run the checklist above. Count your checks.
- Pull your documents: 3 months bank statements, 2 years tax returns, YTD financials.
- Know your numbers: Credit score, revenue, time in business, average daily balance.
- Talk to a broker: We match you to the right product and provider — no credit impact to start.
We're Westvalve Financial. We've helped U.S. businesses navigate financing decisions since 2020. We don't lend — we connect you with providers who do. No obligation to explore your options. Financing is subject to provider approval and program requirements.
Frequently Asked Questions
What's the main difference between a line of credit and a term loan?
A line of credit is revolving — you draw what you need up to your limit, repay, and redraw. Interest only on what you use. A term loan is a lump sum with fixed payments over a set term. Interest on the full amount from day one.
Which is better for cash flow gaps?
A line of credit is better for recurring cash flow gaps. You draw when you need it, repay when cash comes in, and the credit is available again. A term loan gives you a lump sum once — better for one-time investments.
Can I have both a line of credit and a term loan?
Yes. Many businesses use a term loan for a large one-time purchase (equipment, real estate) and a line of credit for day-to-day working capital needs. They serve different purposes and can complement each other.
Which has lower interest rates?
Term loans often have slightly lower fixed rates (7-15% APR) because they're fully amortizing. Lines of credit typically have variable rates (Prime + 1-5%) that can rise. But you only pay interest on what you draw with a line of credit.
Can I convert a line of credit to a term loan?
Some lenders offer a 'term out' feature where you can convert an outstanding line of credit balance to a term loan with fixed payments. This locks in the rate and gives predictable payments. Not all lenders offer this — ask upfront.
What credit score do I need for each?
Line of credit: typically 600+ for alternative, 660+ for bank. Term loan: 650+ for alternative, 680+ for bank. SBA term loans: 680+. Strong revenue and time in business can offset lower scores for both.
Which is better for equipment purchases?
Term loan or equipment financing is better for equipment. The asset secures the loan, giving lower rates and longer terms matched to the equipment's useful life. A line of credit works but wastes revolving capacity on a fixed asset.