Cash flow
Business line of credit vs term loan: which should you choose?
A term loan suits a single, known expense. A line of credit suits recurring or unpredictable needs. Here is how to decide.
- Reviewed by
- Kama Atcheson, Business lending specialist
- Published
- Last reviewed
- Reading time
- 5 min read
Key takeaways
- A term loan gives you a lump sum repaid over a fixed term.
- A line of credit gives you a limit to draw, repay and redraw.
- Lines of credit often charge interest only on what you use, but check for line fees.
Both products can fund the same business, but they solve different problems.
Term loan
You borrow a lump sum and repay it over a fixed term, usually with regular repayments that include interest. Term loans suit one-off, known costs: a fit-out, an acquisition, equipment or consolidating other debts.
Pros: predictable repayments and a clear end date. Cons: you pay interest on the full amount from day one, even if you do not need it all at once.
Line of credit
You get an approved limit you can draw from, repay and redraw. Many lenders only charge interest on the amount drawn, which suits uneven cash flow.
Pros: flexibility and you only use what you need. Cons: possible line or undrawn fees, and the discipline to repay.
How to choose
| Your need | Better fit |
|---|---|
| One-off investment with a known cost | Term loan |
| Seasonal or unpredictable cash gaps | Line of credit |
| Paying suppliers early or buying stock | Line of credit or trade finance |
| Consolidating expensive short-term debt | Term loan |
Compare working capital finance and business loans, or use the repayment calculator to model a term loan.
Questions about this topic
Can I have both a line of credit and a term loan?
Yes. Many businesses use a term loan for a specific investment and a line of credit as a working capital buffer. Lenders will assess the combined repayments.
Do lines of credit have a term?
Many are reviewed or renewed periodically, and some convert each drawdown into its own repayment schedule. Check the product details.
