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

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.

Once a line of credit fits your need, see our full comparison of the best business lines of credit in 2026 to compare specific bank and non-bank issuers.

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.