Business Line of Credit vs. Term Loan: Choosing the Right Tool

A business line of credit is a revolving facility — the lender approves a maximum limit, and the borrower draws and repays funds repeatedly during a draw period. Interest is charged only on the outstanding balance, which makes a line of credit a strong fit for fluctuating working capital needs such as payroll smoothing, inventory restocking, and short receivable cycles.

A term loan is a one-time advance with a fixed amortization schedule. The full balance is disbursed at closing, and the borrower repays the principal plus interest over a set number of months or years. Term loans are well-suited to defined, one-time projects: a build-out, an equipment purchase, an acquisition, or a debt consolidation.

When evaluating cost, look beyond the headline rate. Lines of credit may carry annual renewal fees, unused-line fees, and draw fees in addition to interest. Term loans may carry origination fees, packaging fees, and prepayment penalties. The all-in cost depends on how the facility is used.

Underwriting standards differ. Revolving lines tend to weigh accounts-receivable quality, monthly cash flow, and the operating account history more heavily; term loans focus on debt-service coverage and collateral. A borrower with strong recurring revenue but limited hard collateral may qualify for a line of credit before a term loan.

Tesni helps owners model both options and submit a single, well-prepared file to multiple lenders. We are a marketplace and broker — we do not guarantee approval, available limit, or rate. All offers are issued by third-party lenders subject to their own underwriting.