Small business line of credit vs. term loan: which is better?

Choose a line of credit if your need is recurring — seasonal cash flow gaps, payroll timing, inventory cycles. Choose a term loan if your need is a specific one-time investment — equipment, renovation, acquisition, or expansion. Lines of credit charge interest only on what you draw; term loans give you a lump sum at a fixed schedule. The 2025 Federal Reserve Small Business Credit Survey found 52% of small employers sought a line of credit vs. 44% who sought a term loan, making LOCs the most common product sought by small businesses. Updated June 2026.

Choose a line of credit for recurring needs — seasonal cash flow gaps, payroll timing, inventory cycles. Choose a term loan for one-time investments — equipment, renovation, acquisition, expansion. Lines of credit charge interest only on what you draw; term loans disburse a lump sum on day one. The 2025 Federal Reserve Small Business Credit Survey found 52% of small employer firms sought a line of credit versus 44% who sought a term loan, making LOCs the most common financing product for small businesses. Here's the full breakdown.

Business line of credit: how it works

A business line of credit is revolving: you're approved for a maximum amount (say, $150,000), you draw what you need, repay it, and the credit resets. You pay interest only on the outstanding balance — not on the full credit limit. Most lines are 12-month facilities that renew annually. Rates: 8–28% APR depending on credit profile, lender type, and whether the line is secured or unsecured. Best for: working capital gaps, seasonal needs, payroll timing mismatches, inventory purchases, and any recurring short-term need.

Term loan: how it works

A term loan delivers a lump sum upfront that you repay on a fixed schedule (weekly, monthly) over a defined term (1–10 years for small business; 10–25 years for SBA). Interest accrues on the full balance from day one — the structure assumes you need the full amount immediately. Rates: 6–30% APR for bank/SBA loans; 18–50% for non-bank lenders; MCA factor rates are not APR-comparable. Best for: equipment purchase, commercial real estate, business acquisition, tenant improvements, or any investment that generates a defined return over time.

Side-by-side comparison

Structure: LOC is revolving (draw-repay-redraw). Term loan is a one-time lump sum.
Interest: LOC charges interest only on drawn balance. Term loan charges interest on the full outstanding principal.
Term: LOC renews annually (typically). Term loans have fixed maturities (1–25 years).
Best use: LOC for recurring, variable needs. Term loan for specific, defined investments.
FICO floor: Both require 650+ for bank products; 600+ for non-bank. SBA LOC (CAPLine) requires 680+ at most preferred lenders.
Approval speed: Non-bank LOC: 1–3 days. Non-bank term loan: 1–5 days. Bank/SBA: 2–8 weeks.

Which to choose for common scenarios

Covering a payroll gap: Line of credit — draw exactly what you need, repay when receivables come in.
Buying equipment ($50K): Term loan — the equipment life matches the loan term; structured repayment is appropriate.
Seasonal inventory build (pre-holiday): Line of credit — draw in September–October, repay in January.
Expanding to a second location: Term loan — major one-time investment with defined timeline.
Emergency cash buffer: Line of credit — best used as a standby facility; draw only in genuine emergencies.
Business acquisition ($300K): SBA 7(a) term loan — appropriate structure for a large one-time acquisition.
B2B invoice gaps (30–60 day terms): Line of credit or invoice factoring — matching the receivable cycle.

Apply at ClearValue Lending

Start your application at Find my match. Tell us your use case and we'll identify the right structure — LOC, term loan, or SBA product — and route to one matched lender partner. ClearValue Lending is a funding platform, not a lender or financial advisor.

Sources

Business lines of credit were the most common financing type sought by small employer firms in the 2025 SBCS: 52% of applicants sought a line of credit, versus 44% who sought a term loan. — Federal Reserve 2026 Report on Employer Firms (2025 SBCS)
SBA CAPLines — the SBA's line-of-credit programs — include the Seasonal CAPLine, Contract CAPLine, Builder's CAPLine, and Working Capital CAPLine, each with a maximum of $5 million under the 7(a) umbrella. — SBA.gov — 7(a) Loans
The Federal Reserve 2026 Report on Employer Firms found small employers most commonly cited meeting operating expenses (56%) and expanding the business (46%) as their top reasons for seeking financing — with LOCs aligned to the former and term loans to the latter. — Federal Reserve 2026 Report on Employer Firms (2025 SBCS)

Key takeaways

LOC = recurring, variable, revolving needs. Term loan = specific, one-time, lump-sum investments.
LOC charges interest only on the drawn balance; term loan charges on the full outstanding principal.
52% of small businesses sought an LOC in 2025 (Federal Reserve SBCS) — the most common product.
SBA CAPLines offer LOC structures up to $5M with SBA-backed rates — the best terms for working capital.
Match the structure to the use: seasonal gaps → LOC; equipment/expansion → term loan.