Business Line of Credit vs. Term Loan

What each is for

A line of credit is for working-capital fluctuations: covering a payroll between an enterprise customer's invoice and their payment, smoothing seasonal dips, taking a bulk-discount opportunity. You pay interest only on what you draw. Limits typically range from \$10K-\$500K for small businesses.

A term loan is for one-time investments: equipment, an acquisition, a build-out, refinancing higher-cost debt. You receive a lump sum, pay interest on the full amount from day one, and amortize over 1-10 years. Typically cheaper per dollar than a line because the bank's risk is lower (defined repayment schedule).

Cost and qualification

Lines of credit usually carry variable rates (Prime + 1-5%) plus an unused-line fee (0.25-0.50% annually on undrawn balance). Term loans carry fixed rates, usually a few points below the line rate. Both require personal guarantees for most small businesses.

Apply for a line before you need it — banks underwrite to financial strength, and a business in trouble is the worst candidate. The classic advice: 'borrow money when you don't need it.' Many service businesses set up a modest line during a strong year and never draw it, just to have the option.

Choosing the right instrument

Match the instrument to the use case. A line of credit is for working-capital swings — bridging the gap between paying labor and collecting from customers, or covering a seasonal trough. A term loan is for long-lived assets — equipment, vehicles, leasehold improvements, an acquisition — that will produce returns over multiple years and can be amortized to match.

Using a line of credit for a long-term purpose is dangerous. The line gets fully drawn, the bank rebalances by reducing your limit at renewal, and you're suddenly upside down. Conversely, using a 5-year term loan to fund 60 days of working capital means you're still paying interest on the principal long after the cash gap has closed.

Cost matters less than fit. A line at SOFR + 4% might be cheaper than equipment financing at 8%, but if the line gets called or limited, the equipment-financed asset keeps running. For owner-operators, having both a working-capital line and term debt for major assets — sized appropriately — is the textbook capital structure.

Re-test your credit options annually whether you need to draw or not. Bank pricing, structure, and willingness to extend change with macroeconomic conditions; a relationship that was tight in 2021 may have much better terms available in 2026. The annual conversation also strengthens the relationship for the moment when you actually need flexibility.