Business Line of Credit vs. Term Loan: Which Is Right for Your Business?

Hello there – great to have you reading! I’m part of the Eboost Partners team, and I’ve spent countless hours helping small businesses choose between different financing options. It’s an exciting process, but it can also feel overwhelming. You might wonder: Should you go with a business line of credit vs term loan? Let’s explore this in a relaxed yet in-depth conversation.

By the way, if you’re looking for funding right now – Eboost Partners offers bussines loans ranging from $5,000 to $2,000,000, with repayment terms up to 24 months, plus convenient daily or weekly payments. We’re big on making sure you get the resources (and the breathing room) you need to succeed.

What Is a Business Line of Credit?

A business line of credit is like having an ongoing financial safety net. You get approved for a set credit limit – say $20,000 – and then you can draw from those funds whenever you need extra cash. Payment terms depend on what you borrow, not the total approved limit. This approach helps smooth out those unpredictable dips and spikes in your cash flow.

I often compare it to how a person might keep an emergency credit card in their wallet – except in this context, it’s used for your business and might have more favorable terms than some credit cards. If you’re curious and want a deeper look, you can check our dedicated article on what is a line of credit for a more thorough explanation.

What Is a Term Loan?

A term loan is what most folks picture when they think of business financing: you borrow a lump sum – $50,000, for instance – and agree to repay it over a fixed period with a set repayment schedule. Many term loans run anywhere from a few months to several years, and the interest rate is typically fixed. You’ll pay a consistent amount until the debt is cleared, which can make budgeting simpler.

Since I’ve seen lots of business owners wonder if a term loan or a line of credit is better, we put together a larger guide on line of credit vs loan. It breaks down pros, cons, and everything in between so you can make an informed choice.

Key Differences Between a Business Line of Credit and a Term Loan

Here’s the thing: While both a line of credit and a term loan can give you the working capital to grow your company, they’re quite different in structure. To give you a quick snapshot, I’ve outlined several essential points below.

The following sections break down these differences further.

Loan Structure and Accessibility

A business line of credit is revolving. You can dip in and out of the funds up to your limit – sort of like a flexible cushion. Term loans, on the other hand, are more of a one-shot deal. You get a chunk of money upfront and then repay it over a fixed schedule. If you ask me, the line of credit arrangement can be especially appealing if you’re trying to manage uncertainties – like fluctuating inventory costs or seasonal staffing.

Accessibility is another big difference. Some lines of credit are easier to access once you’re approved; you just request what you need without going through a second application. That convenience can be a game-changer if you frequently face unexpected bills or want to pounce on quick business opportunities.

Repayment Terms and Schedule

Term loans often come with a fixed monthly payment. You know exactly what you owe each period, which can help with planning. By contrast, a line of credit typically requires payments only on the portion you actually use. If you don’t draw funds this month, you don’t pay interest this month. Nice and simple.

For instance, you might snag a line of credit of $100,000 but only tap into $10,000 in a slow season. In that case, you’ll only be making payments on that $10,000. This arrangement can feel more fluid and reduce unnecessary costs, especially if your needs ebb and flow.

Interest Rates and Costs

Many business lines of credit come with variable interest rates, which might shift based on market conditions or the lender’s internal benchmarks. A term loan, by contrast, often has a fixed rate that stays the same throughout the repayment period. If you prefer stability – knowing your interest won’t shift even if market rates jump – then a term loan might feel more reassuring.

But watch out: some lines of credit have higher rates than certain term loans. However, because you only pay interest on what you borrow, a higher rate might not kill your budget if you don’t draw large sums.

Collateral and Qualification Requirements

The question of whether you’ll need collateral or a personal guarantee can differ based on your lender and your financial standing. A business line of credit may be secured or unsecured. Secured means you’re putting up collateral (like equipment or property), while unsecured relies on your creditworthiness.

Term loans often involve collateral or a personal guarantee, especially for bigger amounts. Still, if you’ve got a healthy track record, you might qualify without needing to tie up assets. As with all financing, your business history, credit score, and financial statements play a huge role. If you’re wondering, “does business line of credit affect credit score?”, the short answer is yes. Lenders usually do a credit check, and your usage might show up on your credit report. But managed carefully, it shouldn’t hurt; it might even help build your business credit over time.

Best for Short-Term vs. Long-Term Financing

If you’ve got a short-term gap – say you’re waiting on customer payments or bridging a slow sales season – a business line of credit can be perfect. It provides a flexible safety net to keep you afloat. If you’re planning a bigger, longer-term endeavor – purchasing new machinery, expanding locations, or other capital-intensive projects – a term loan often makes more sense. It sets a clear plan for repayment, and the lump sum can be used right away to jumpstart your idea.

In some cases, folks try to compare line of credit vs credit card for short-term needs, but credit cards can have higher interest rates. On the other side, home equity loan vs line of credit might come up if you’re considering using your personal property to fund business expansions. That can be a riskier path, so think carefully before tying up your home in your business financing.

When to Use a Business Line of Credit

Lines of credit shine when you have recurring but unpredictable expenses. For instance, a restaurant owner might use it for unexpected equipment repairs (someone left the freezer door ajar all night – yikes!). Or a consultant might employ it to cover travel costs before clients reimburse them. Because you borrow incrementally, you don’t get stuck paying interest on funds you never needed.

Sometimes, new businesses also ask about the Best Business Lines of Credit or the Business Line of Credit for a New Business. While lines of credit are often a tad more accessible than you might think, some lenders do require a bit of business history. If you’ve only been operating for a few months, you might explore an alternative lender – like Eboost Partners – who looks at your broader financial picture, not just how many years you’ve been around.

There’s another perk: lines of credit can reduce the temptation to spend everything all at once. Since you only borrow as needed, you’re less likely to overextend your budget. When used responsibly, it’s a great strategy to keep your day-to-day operations running smoothly.

When to Use a Term Loan

Term loans excel at funding well-defined projects. If you’re purchasing a new fleet of delivery vehicles or remodeling your storefront, a term loan can provide the chunk of money you need for those major expenditures. You’ll get the money upfront, which is especially helpful when you’ve already pinned down the costs of your project.

Term loans also tend to work well if you’re able to wait for the approval process, which sometimes takes a bit longer for more traditional lenders. If you have a clear plan of how much you need – whether it’s $5,000 or $2 million – a term loan can lock in that amount at a (sometimes) lower interest rate. Eboost Partners, for example, offers up to 24-month repayment terms with daily or weekly payments. Many business owners find that consistent schedule easy to handle, especially if they’ve structured their budget around predictable revenue.

Can You Use Both a Business Line of Credit and a Term Loan?

You know what? Some businesses do exactly that. They use a term loan for large, planned expenses and keep a business line of credit in their back pocket for smaller, day-to-day costs. This hybrid approach can balance your financing needs.

Imagine you run a manufacturing company that’s investing in a big piece of machinery. You secure a term loan for that large purchase. Meanwhile, you keep a line of credit on standby to pay vendors, cover inventory shortfalls, or handle the “surprise” orders that might pop up. Used wisely, the two can complement each other and keep your operations humming along.

If your question is whether you can literally pay off a term loan with a line of credit, it’s not impossible, but it can be risky. Taking on new debt to clear old debt might become a slippery slope, so consult a financial advisor or discuss your plan with a trusted lender (I’d be happy to chat with you at Eboost Partners) before you go that route.

Conclusion

Choosing between a business line of credit vs. a term loan boils down to how you plan to use the funds. If your needs are ongoing and unpredictable, a line of credit can bring peace of mind. If you’re investing in a major project that’s easy to budget for, a term loan might fit like a glove.

But sometimes, the ideal setup is a blend: a term loan for the big stuff and a line of credit for everyday bumps along the way. Either way, I’m a firm believer that access to flexible financing is key to chasing growth and smoothing out cash flow hiccups.

If you want to chat specifics or explore the types of lines of credit available, feel free to reach out. We at Eboost Partners have helped thousands of small businesses secure the capital they need – whether it’s $5,000 or $2 million. And we do it with automatic daily or weekly repayments, which many clients find incredibly convenient.