A line of credit gives you a revolving draw-and-repay facility — pay interest only on what you use. A term loan gives you a lump sum upfront with fixed repayment. Lines win for recurring cash-flow gaps; term loans win for one-time capital investments.
Banks, credit unions, and non-bank lenders
Revolving credit facility — draw what you need, repay, draw again.
Pros
Banks and non-bank lenders
Lump sum upfront, fixed repayment schedule — right for defined capital investments.
Pros
Pick Business Line of Credit if: Businesses with recurring short-term cash flow gaps: payroll timing, inventory cycles, seasonal fluctuations.
Pick Business Term Loan if: Businesses with a specific capital use: equipment, build-out, acquisition, hiring, or inventory purchase with a defined payback.
Apply for a Line of Credit →Apply for a Term Loan →
It depends on the use case — neither is universally better. A line of credit is better for recurring, variable needs: managing payroll during slow weeks, bridging receivables, covering seasonal gaps. A term loan is better for one-time, defined capital uses: equipment purchase, leasehold improvements, acquisition. The Federal Reserve Small Business Credit Survey 2024 (https://www.fedsmallbusiness.org/survey/2024/2024-report-on-employer-firms) shows most small businesses use lines of credit for cash-flow management and term loans for fixed-asset investment. If your business qualifies for both, using them together — a term loan for capital, a line for working capital — is the most flexible structure.
Choose a line of credit when your funding need is recurring and variable — managing payroll during a slow week, bridging a receivables gap, covering seasonal inventory cycles. A line of credit lets you draw only what you need and pay interest only on the drawn balance. The Federal Reserve Small Business Credit Survey 2024 (fedsmallbusiness.org) shows lines of credit are most commonly used for cash-flow management rather than capital investment.
A business line of credit is revolving — you draw, repay, and draw again up to your approved limit, paying interest only on the outstanding balance. A business term loan is a one-time lump sum disbursed upfront, with a fixed repayment schedule (typically daily, weekly, or monthly). Term loans accrue interest on the full balance from day one; lines only charge interest on what you've drawn. Use a term loan for defined capital investments with clear payback horizons; use a line for recurring working-capital management.
Both require solid credit, but the specific thresholds differ by lender and product tier. For non-bank lenders: lines of credit typically require 620+ FICO and 12+ months in business; term loans from the same non-bank lenders typically start at 600+ FICO and 6+ months in business. SBA 7(a) term loans (the lowest-cost option) require 680+ FICO and 2+ years in business at most lenders. Lines of credit at banks usually have higher bars — 700+ FICO and established banking relationships are common requirements.
Yes — having both is a normal and often optimal capital structure. A term loan finances a specific asset (equipment, leasehold improvements, an acquisition); a line of credit manages day-to-day working capital. Many small businesses run both simultaneously. Lenders underwrite them independently, though having multiple debt obligations affects your debt-service coverage ratio — which lenders consider when approving additional credit.
Business lines of credit from online lenders are available with FICO scores as low as 600–625, though rates improve significantly above 680. Traditional bank lines typically require 680+ personal FICO and strong business financials. Term loans have similar variance: non-bank lenders may fund at 600+ FICO for shorter terms; SBA and bank term loans generally require 680–700+ personal FICO plus 2+ years in business and documented revenue. Source: Federal Reserve Small Business Credit Survey at fedsmallbusiness.org and lender published guidelines.
Independent editorial comparison. ClearValue Lending is not the issuer of any product compared here; affiliate links may pay a referral commission at no cost to you — selection is independent of compensation.