Line of Credit vs Term Loan: Which One Fits What

These two products get compared on cost when they should be compared on shape. One is a reusable safety valve; the other is a single defined purchase. Choosing by rate alone is how businesses end up with the wrong tool at the right price.

Term loan: one purpose, one schedule

You receive a lump sum and repay it on a fixed schedule over a set period. It suits a specific, one-time need with a known cost: a piece of equipment, a build-out, an acquisition. The payment is predictable, which makes planning easy. What it doesn't do is flex — once it's repaid, it's gone, and borrowing again means applying again.

Line of credit: available, reusable, flexible

A line gives you an approved limit you can draw against as needed, repay, and draw again. You generally pay for what you use rather than the full limit. That makes it the right instrument for recurring or unpredictable needs — covering a slow month, buying inventory before a season, floating materials between draws.

A quick decision table

• One-time, known cost (equipment, project, acquisition) → term loan
• Recurring or unpredictable timing gaps → line of credit
• Inventory bought ahead of a season and sold through → line of credit
• Long-lived asset you'll use for years → term loan, matched to the asset's useful life

Things to check on either one

• Total cost over the full term, including origination and any fees
• For lines: draw fees, maintenance or unused-line fees, and whether the limit can be reduced
• Whether payments are monthly, weekly or daily — this affects cash flow more than owners expect
• Prepayment terms: is there a benefit to paying early, or a penalty?
• Collateral and personal guarantee requirements

Related: what is a working capital loan and financing for cash-flow gaps. FundPath's free assessment shows which of these your situation actually maps to — no credit impact.