What's the difference between a business line of credit and a term loan?

Revolving vs. installment credit — the structural difference

A business line of credit is revolving credit — a committed facility you draw from as needed, up to a maximum. You pay interest only on outstanding balances; undrawn capacity costs nothing (or a small unused-line fee). Repay, and capacity restores. A term loan is installment credit — a single lump-sum disbursement on a fixed repayment schedule. Interest accrues on the full principal from day one, whether or not you've deployed all the funds. The Federal Reserve H.15 weekly release anchors both products to the prime rate, but the all-in cost differential depends heavily on how much capacity you actually use.

• LOC — draw only what you need; pay interest only on outstanding balance; reusable as you repay
• Term loan — fixed disbursement; interest on full balance from day one; single deployment
• LOC — fits recurring, unpredictable, or seasonal needs (payroll, inventory gaps, working capital)
• Term loan — fits defined, one-time deployments (equipment, renovation, acquisition)
• LOC — typically requires annual renewal; term loan has a fixed maturity
• LOC — often has a variable rate tied to prime; term loans can be fixed or variable

Cost differential — when each wins on price

If you draw and repay a $100,000 LOC four times over a year (each $50,000 draw outstanding for 30 days), your effective interest cost is based on $50,000 for ~120 days — far less than a $200,000 term loan outstanding for 12 months at the same rate. But if you draw the full LOC and hold it for the entire year, the LOC and term loan are economically equivalent (same outstanding balance, same rate). The SBA 7(a) program offers both term loans and revolving lines — the choice between them at SBA pricing is purely use-case driven.

Qualification differences

Lines of credit are slightly harder to qualify for than term loans of the same size because lenders are committing to a facility you may draw on repeatedly. Most lenders want to see: 680+ FICO (owner), 2+ years in business, $150,000+ annual revenue for lines above $50,000. Term loans have similar floors but lenders can model the repayment more precisely — one disbursement, fixed schedule. The Federal Reserve Small Business Credit Survey shows lines of credit remain among the most-requested financing products among employer firms, with term loans close behind.

Secured vs. unsecured

Both LOCs and term loans can be secured (collateral required) or unsecured (no collateral, typically smaller amounts and higher rates). Unsecured LOCs up to $250,000 are common in the alternative lending market. Secured LOCs (often backed by AR, inventory, or a blanket lien) can go much larger. Secured term loans can reach $5M+ under SBA 7(a).

Apply at ClearValue Lending

Not sure whether a line of credit or a term loan is the right structure? At ClearValue Lending, your file routes to the funding partners best matched to it providers. Apply at Find my match.