The fundamental difference in one paragraph
A business term loan is a one-time lump sum. You receive the full amount upfront, pay the same fixed amount every month for 1 to 5 years, and the balance amortizes to zero on the final payment. Interest accrues on the full principal from day 1. A business line of credit is a revolving credit facility. You draw any amount up to the limit, pay interest only on what you have drawn, pay back, draw again. Lines stay open 12 to 24 months and renew on review. Loans are for known one-time spends. LOCs are for ongoing or unpredictable needs.
Side-by-side comparison
The math: when LOC actually wins on cost
The marketing line "loans are cheaper than LOCs" is technically true on fully-utilized capital but misses the use case. Two scenarios show how the math actually plays out.
Scenario A: $100K capital, fully utilized for 12 months
Term loan at 14% APR vs LOC at 18% APR (both $100K, fully drawn)
When capital is fully utilized and stays drawn, the term loan wins on rate.
Scenario B: $100K available capital, average utilization 35%, 12 months
Term loan at 14% APR vs LOC at 18% APR (LOC drawn at $35K avg)
When capital is needed availably but not fully utilized, the LOC wins by a lot. The lesson: rate matters less than utilization pattern. If you do not need the full amount drawn at all times, the LOC structure usually saves money even at a higher rate.
When LOC wins
Seasonal businesses
Restaurants, retail, contractors, landscaping. Revenue dips and rises. The LOC sits available in slow weeks, draws when needed, pays back when peak revenue clears. Term loan would charge interest on the full balance year-round.
Unpredictable cash needs
You don't know exactly when or how much you'll need. Equipment failure, surprise opportunity, vendor payment timing. The LOC is the safety net. Term loan locks you to a specific dollar amount today.
Short-payback uses (under 6 months)
Inventory load for a peak season, payroll bridge to next AR cycle. Draw, use, pay back. Total interest on a 60-90 day draw is dramatically lower than a 12-month term loan's principal interest.
Building business credit over time
LOCs report ongoing balance and utilization to business credit bureaus monthly. Responsible use (under 50% utilization, on-time payments) builds business credit faster than a term loan that just sits as a single tradeline.
When the business loan wins
Known one-time spend with measurable ROI
Acquisition deposit, build-out, equipment purchase, hiring ramp with measurable CAC. You know the dollar amount, you'll use all of it, the ROI plays out on a fixed schedule. Lump sum + fixed monthly payment + lower rate = correct tool.
Capital that needs to stay deployed 12+ months
If you'll fully utilize the capital and keep it that way for the full year, the LOC's "only pay on what you draw" advantage disappears. Term loan at 14% APR beats LOC at 18% APR on fully-utilized capital.
Predictable budgeting
If your CFO or accountant wants a fixed monthly payment they can model, the term loan provides it. LOC interest fluctuates with utilization, which makes monthly budgeting less precise.
Larger amounts ($250K+)
Most unsecured LOCs cap at $250K. Larger needs ($250K-$5M) usually move to term loans or SBA 7(a). The LOC simply isn't sized for the use case.
The hybrid play (run both)
Most established businesses we work with run a term loan AND a line of credit, each for a different purpose. The term loan handles the planned spend (acquisition, expansion, equipment), with the security of a fixed monthly payment that can be modeled in the P&L. The LOC handles the unpredictable: a slow week, a supplier opportunity, an unexpected repair.
Setup order matters: apply for the LOC first. Adding a term loan after the LOC is already in place is much easier than the reverse, because the term loan adds a known monthly obligation that lenders factor into the LOC's debt-service ratio. If the LOC application sees the term loan first, your LOC limit will be lower.
The 3-question decision tree
If you are deciding between the two products, three questions decide it:
- 1. Is the spend a known one-time amount, or an ongoing/unpredictable need? Known = loan. Unpredictable = LOC.
- 2. Will you use the full amount immediately and keep it borrowed for 12+ months? Yes = loan (rate wins on fully-utilized capital). No = LOC (only pay on what you draw).
- 3. Is the use of funds something that produces a known return on a fixed schedule? Marketing campaign with measurable CAC, equipment with measurable productivity gain, acquisition with measurable EBITDA = loan. Seasonal cash flow, surprise opportunities, payroll bridges = LOC.
If you cannot answer those clearly, the broker's job is to ask the right follow-ups and recommend. Here is how that conversation works.