In this article
"Should I get a term loan or a line of credit?" comes up constantly, and the honest answer is that it depends on whether you're funding a specific, one-time need or an ongoing, unpredictable one. Here's how the two actually differ in practice.
The Core Difference
A term loan gives you a lump sum upfront that you repay on a fixed schedule — once it's disbursed, you can't draw more without applying again. A line of credit gives you access to a set credit limit that you can draw from, repay, and draw from again, similar to a business credit card but usually at a lower rate and with a higher limit.
When a Term Loan Makes More Sense
A term loan tends to fit better when:
- You know the exact amount you need and what it's for
- You're funding a specific project — expansion, renovation, a partner buyout
- You want a predictable, fixed monthly payment
- You're borrowing a larger amount that you'll use in full
When a Line of Credit Makes More Sense
A line of credit tends to fit better when:
- Your cash flow need is ongoing or unpredictable — payroll gaps, seasonal inventory, unexpected repairs
- You want to only pay interest on what you actually use
- You want a financial cushion available without needing to reapply every time
- You're managing timing gaps between receivables and payables
Cost Comparison in Practice
Term loans typically carry a fixed, predictable total cost since you're paying interest on the full disbursed amount over the agreed term. Lines of credit can cost less if managed actively — drawing only what's needed and repaying quickly — but can also become more expensive than a term loan if a balance is carried indefinitely.
