When should I choose a business term loan versus a business line of credit?

A business term loan delivers a lump sum repaid on a fixed schedule — best for a one-time investment with a known cost. A business line of credit lets you draw, repay, and redraw up to a limit — best for recurring working capital needs where the amount and timing are variable.

How each product works

A term loan disburses the full loan amount at closing. Principal and interest payments begin immediately (or after a defined interest-only period). The borrower pays interest on the full balance from day one — there is no benefit to early repayment in terms of reducing outstanding balance until principal payments are applied. A line of credit has a credit limit but disburses nothing until the borrower draws. Interest accrues only on the drawn balance. A business that draws $20,000 on a $100,000 line pays interest on $20,000 — not $100,000. The SBA CAPLines program is the SBA-guaranteed equivalent of a revolving line of credit for working capital.

When a term loan fits

Equipment purchase — the cost is known, the asset is fixed, and a term matched to the equipment's useful life amortizes correctly.
Business acquisition — a one-time transaction requiring a specific amount on a specific date.
Commercial real estate — long-term asset requiring long-term fixed financing.
Leasehold improvements — one-time buildout with a predictable cost and a fixed payback period.
Debt consolidation — replacing multiple obligations with a single structured payment.

When a line of credit fits

Payroll bridge — covering payroll during receivables gaps without paying interest on unused capacity.
Seasonal inventory build — drawing pre-season, repaying post-season, drawing again next year.
Contract-driven cash flow gaps — advancing funds when a signed contract creates a known future receivable.
Emergency buffer — maintaining available credit as insurance without incurring ongoing interest cost.
Accounts payable timing — paying vendors early for discounts while waiting for customer collections.

Interest calculation differences

Term loans charge interest on the outstanding principal balance — a $200,000 loan at 8% costs $16,000 in year-one interest (declining as principal is repaid). Lines of credit charge interest only on drawn balances — a $200,000 line with $50,000 drawn at 9% costs $4,500 annually. The term loan costs more in absolute interest dollars but provides all the capital upfront. The line costs less when unused capacity is maintained — but many businesses under-utilize their lines and pay commitment fees or unused-line fees instead.

Qualification differences

Lines of credit typically require stronger credit profiles than term loans of equivalent size — lenders are underwriting a revolving commitment, not a one-time disbursement. Most bank LOCs require 2+ years in business, 680+ owner FICO, and demonstrated revenue with seasonal patterns that justify revolving use. Term loans can be approved with shorter business history (6+ months for alternative products) and lower FICO floors. The SBA CAPLines program uses 7(a) eligibility standards but structures the product as a revolving line rather than a term.

Term Loan vs Line of Credit — Key Facts

The SBA CAPLines program offers four types of SBA-guaranteed revolving lines of credit — Seasonal, Contract, Builders, and Working Capital — each structured for a specific type of recurring cash flow need, with revolving limits up to $5M. — SBA — CAPLines Program
The Federal Reserve's Small Business Credit Survey finds that business lines of credit and term loans are the most commonly sought financing products among employer firms. — Federal Reserve — 2024 Small Business Credit Survey
SBA 7(a) term loans and CAPLines LOCs both use the same statutory maximum of $5M and the same base interest rate framework (Prime + spread), but the CAPLines structure allows borrowers to draw, repay, and redraw within the commitment period. — SBA — 7(a) Loan Program Overview

Key takeaways

Term loans disburse a lump sum and charge interest on the full balance from day one — best for one-time investments with predictable costs.
Lines of credit charge interest only on drawn balances — materially cheaper when the need is episodic or seasonal rather than continuous.
LOCs require stronger credit profiles than term loans of equivalent size — lenders underwrite a revolving commitment, not a single disbursement.
The SBA CAPLines program provides SBA-guaranteed revolving lines of credit for seasonal, contract-driven, and working capital needs.
A business with both a recurring working capital need and a one-time capital need often benefits from pairing a term loan (the capital project) with a revolving LOC (the operating buffer).