No, one option is not better for everyone. A line of credit fits ongoing or unpredictable costs, since you draw only what you need and pay interest on that portion of the balance. A term loan fits one large, planned purchase that you repay in equal monthly installments over a fixed schedule.
The right choice depends on how predictable your costs are and how much rate risk your budget can absorb. Bankrate's review of the Federal Reserve's 2024 Small Business Credit Survey data, the most recent full data set available as of 2026, found that about 40% of owners applied for a line of credit, a figure only slightly ahead of the roughly 33% who applied for a term loan that year.
đź’° How interest builds up on a draw-as-you-go line versus a lump-sum loan
🧮 A full worked example comparing the interest cost of a $50,000 line and a $50,000 loan
đź“‹ Which situation points you toward a line of credit, and which points toward a loan
⚠️ The fees and mistakes that quietly raise your borrowing costs
âś… The steps to take before you apply for either one
This article reflects lending terms and typical rates as of 2026, since rates, fees, and draw-period rules vary meaningfully by lender. Confirm the current terms on any offer before you sign it. This guidance also does not replace advice from a licensed accountant or loan officer, who can review your specific financial statements and cash flow.
How a Business Term Loan and a Line of Credit Work
A term loan gives you one lump sum upfront, disbursed into your business account in a single transaction. You receive it in one payment, then repay it on a fixed schedule the lender sets in advance. That schedule locks in your rate, your monthly payment, and your payoff date before you spend a single dollar. Interest starts building on the full amount right away, whether you use all of it immediately or let some sit untouched.
A business line of credit works on a fundamentally different structure. It is a pool of approved credit you can draw from, repay, and draw from again as circumstances change. In that sense it resembles a credit card built specifically for business expenses, rather than a one-time disbursement.
Some lenders set a fixed draw period, often followed by a separate repayment phase once that window closes. Others let you repay each draw on its own short schedule, independent of any single fixed cutoff date. Either structure still ties your payment to what you have drawn from the line, not to the full amount the lender approved.
In both cases, you pay interest only on the portion you draw, not on the entire approved limit. A $50,000 term loan charges interest on the full $50,000 starting from day one, regardless of how quickly the business spends it. A $50,000 line of credit only charges interest on the part you have pulled out, which can add up to real savings when a need is spread across the year.
That gap explains why a revolving line, meaning one that refills automatically as you repay it, can cost less overall even at a noticeably higher headline rate. Repayment structure is the other core difference between these two products. A term loan comes with fixed monthly payments that stay identical for the entire life of the loan, which simplifies budgeting considerably. A line of credit comes with a payment that moves along with your balance, so a slow month costs less in payments than a month when you draw heavily against the limit.
| Feature | Business Term Loan | Business Line of Credit |
|---|---|---|
| How you get funds | Lump sum upfront | Draw as needed, up to a limit |
| What accrues interest | The entire loan amount | Only the amount you have drawn |
| Repayment structure | Fixed monthly installment | Repay what you draw, then redraw |
| Typical repayment term | Often 2–10 years; up to 25 years for real-estate-backed SBA loans | Revolving, or 6–24 months once the draw period ends |
| Rate type | Usually fixed | Usually variable |
Most lenders also require a personal guarantee on either product, particularly for a newer or smaller business without an extensive credit history. That means you personally agree to repay the debt if the business itself cannot. Secured versions of both products, backed by equipment, inventory, or real estate, tend to carry lower rates and higher limits than their unsecured counterparts. Unsecured options skip that collateral requirement but usually demand stronger personal credit and steadier revenue instead.
Which Situation Applies to You?
Start with what exactly you are financing before you approach any lender. A defined amount for one purchase, like equipment, a build-out, or an acquisition, usually points toward a term loan. The lump sum structure matches a one-time cost far more cleanly than a revolving balance would. An ongoing or hard-to-predict need, like payroll gaps or seasonal inventory swings, usually points toward a line of credit instead.
Your business's age and revenue history also narrow the field considerably. Newer lenders and online providers often accept thinner track records than traditional banks require for term loans. One example Bankrate highlights is Fundbox, which approves businesses with as little as three months in operation and roughly $30,000 in yearly revenue, among the lowest bars on the market. A business with several years of steady financial statements usually qualifies for both products and can compare rates between lenders freely.
Collateral and credit tolerance matter too. If you have equipment or property to pledge, a secured loan or line usually unlocks a lower rate and a higher limit. If your credit file is thin or new, expect higher rates on a line of credit than on a loan, since lenders price that flexibility as extra risk.
Finally, weigh how much rate risk you can handle. A term loan locks in one rate for the whole term, so your payment stays fixed even if market rates rise. A line of credit often carries a variable rate, so your cost can climb in a rate hike even if your balance stays flat. Build a rate buffer into your budget if you plan to keep a line open for years.
How fast you need the money matters as well. A term loan from a bank can take one to several weeks to fund, while many online lines of credit approve within a few business days. When a deadline is tight, that speed difference can outweigh a slightly better rate elsewhere.
| Your Situation | Likely Better Fit |
|---|---|
| One large, defined purchase | Term loan |
| Seasonal or unpredictable cash flow | Line of credit |
| Thin credit history, need fast approval | Line of credit |
| Want the lowest possible rate and can wait | Term loan |
| Ongoing project with rolling costs | Line of credit |
Worked Example: Interest Cost on a $50,000 Line vs. a $50,000 Loan
Here is the math for a business that needs a total of $50,000 over the course of a year, drawn in stages instead of all at once. Assume the business qualifies for a term loan at 12% APR, or alternatively a line of credit at 15% APR. Both figures sit comfortably inside the typical ranges lenders quote for each product.
That rate gap is realistic, since lines of credit carry higher average rates than comparable term loans for most borrowers. This example uses simple, interest-only math for a single year to keep the comparison clear. It is meant as a model of the underlying mechanism, not a substitute for a real lender's amortization schedule.
With the term loan, the lender disburses the full $50,000 on day one, before the business has spent a cent of it. Interest builds on that entire balance for all 12 months of the term. At 12% APR, that comes to $50,000 multiplied by 12%, or $6,000 in interest for the year. That cost stays fixed no matter how quickly the business ends up needing the cash.
With the line of credit, assume the business draws $20,000 in January to cover an initial gap. It then draws $15,000 in May and another $15,000 in September, repaying nothing until the year ends. Each draw accrues interest only for the months it remains outstanding, not for the entire year regardless of timing. That distinction is exactly why the total lands below the loan's interest cost, even at a noticeably higher rate.
| When It's Drawn | Interest for the Year |
|---|---|
| $20,000 in January (12 months outstanding) | $3,000 |
| $15,000 in May (8 months outstanding) | $1,500 |
| $15,000 in September (4 months outstanding) | $750 |
| Total line of credit interest | $5,250 |
Add up the three draws and the line of credit costs $5,250 for the year. That is about $750 less than the loan's $6,000, even at a rate three points higher. The savings come entirely from timing, since money not yet drawn is not yet charged. That edge flips if the business draws the full $50,000 in January and holds it all year, since the line would then owe interest on the whole balance too.
Where the Costs Add Up
Fees Beyond the Advertised Rate
The interest rate is not the only cost that matters with either product. Lenders can add an origination fee, often 3% to 5% of a term loan's amount, or as high as 5 percent or more on a line of credit. That fee gets charged upfront, regardless of how much you eventually end up using. It comes out of your proceeds directly or gets tacked onto your balance, which raises your effective cost even when the advertised rate looks competitive.
Lines of credit also carry several fees that term loans usually skip entirely. Many charge a monthly or annual maintenance fee simply to keep the line open and available. Many also add a draw fee each time you pull funds, whether that draw gets used productively or not. A few lenders even charge an inactivity fee if you open a line and rarely touch it, turning an unused safety net into a genuine ongoing cost.
Renewal and Draw Terms Vary by Lender
The honest answer to "how much will this cost" depends heavily on the specific lender you pick. Two lenders quoting the identical 10% APR can still differ sharply on the draw period length. They can also differ on the renewal process, and on whether the rate stays fixed or turns variable once the draw period ends.
Some lines renew automatically as long as you remain current on payments. Others demand a full reapplication, along with a fresh credit pull, every year or two. A lender's renewal policy can matter nearly as much as its headline rate once you plan to keep a line open for several years.
Online lenders tend to run the shortest repayment windows once a draw period closes, often only 6 to 24 months. Banks and credit unions often stretch that window out over several years instead, which suits a business that wants predictability. Ask any lender directly whether the line renews automatically and what circumstances trigger a review. Get that answer recorded in writing before you draw a single dollar, so a surprise renewal denial never catches your business off guard.
What the Choice Looks Like for Three Different Businesses
The Boutique Owner Managing Seasonal Swings
Maria runs a boutique home-goods store where cash flow depends heavily on the calendar. Her revenue swings hard between the holiday rush in November and December and the slow months that follow it. She opened a $30,000 line of credit two years ago specifically to smooth that seasonal gap, rather than to fund any single purchase. In a strong December she draws little or nothing at all; in a slow February she might draw $8,000 to cover rent and payroll until spring orders pick back up.
| Season | Typical Draw |
|---|---|
| November–December | $0–$2,000 |
| January–March | $6,000–$9,000 |
| April onward | Repaid in full |
Maria's mistake in her first year was drawing the full $30,000 the moment the slow season started, rather than waiting until she genuinely needed it. She was effectively treating the line like a savings account instead of the flexible tool it was designed to be. That habit meant she paid interest on cash that sat idle in her checking account for weeks at a time. Now she draws in smaller amounts, closer to when bills come due, so her interest cost tracks what the business spends day to day rather than what it might eventually need.
The Contractor Financing One Big Purchase
David runs a three-person electrical contracting business that had outgrown its existing service vehicles. He needed a $40,000 truck to take on larger commercial jobs across a wider service area. He compared a 3-year term loan against a 5-year term loan from the same lender, with both options priced at 8% APR.
The 3-year loan carried a monthly payment near $1,254 and about $5,140 in total interest. The 5-year loan dropped that payment to roughly $811 a month but pushed total interest up to about $8,670. Both loans covered the identical $40,000 truck, so only the repayment length and total cost differed.
| Loan Term | Total Interest Paid |
|---|---|
| 3 years (about $1,254/month) | About $5,140 |
| 5 years (about $811/month) | About $8,670 |
Many owners assume the lower monthly payment is the cheaper choice. In practice it is the more expensive one over the life of the loan. David picked the 3-year term because his revenue could carry the higher payment, and the extra $3,530 saved in interest was worth it to him. A contractor with tighter monthly cash flow might reasonably pick the longer term anyway, trading extra interest for breathing room.
The Staffing Agency Juggling Payroll and Invoices
Priya's staffing agency pays its own employees every two weeks without exception, regardless of client billing cycles. Meanwhile, it typically waits 45 to 60 days to collect payment on client invoices. That timing gap repeats every single cycle, which is exactly the kind of problem a term loan cannot fix. She opened a $75,000 line of credit sized to match her typical payroll gap and drew against it whenever a payroll date landed before a client's payment had cleared.
For a full year, that pattern worked reasonably well. Each draw got repaid within a few weeks once invoices eventually came in. The trouble started when Priya landed two large new contracts at almost the same time.
She drew close to her full limit to cover both payroll runs before either client had paid, and had no room left when a third payroll date arrived. She fixed it by opening a second, smaller line at a different lender as backup. She also asked her biggest client to move to a shorter payment term, which narrowed the gap that was driving the draws.
Getting the Decision Right
A line of credit and a term loan each carry real strengths and real limits. The lists below focus on a line of credit, since it has more moving parts to weigh. Pair them with the do's and don'ts that follow before you apply.
Pros
- Pay interest only on what you draw, so idle credit costs you nothing while it sits unused.
- Reusable once repaid, so one approval can cover months or years of needs without reapplying.
- Faster and easier to qualify for than many term loans, which helps newer businesses banks turn down.
- Builds a lender relationship that can lead to a higher limit or better renewal terms later.
- Fits unpredictable expenses, like a broken machine or a late-paying client, since funds are already approved.
- Often unsecured at smaller limits, so you skip pledging equipment or property.
Cons
- Rates run higher than term loans on average, since lenders price that flexibility as added risk.
- Fees stack up, including origination, maintenance, and draw fees that a term loan usually skips.
- Shorter repayment windows once the draw period ends, which can strain cash flow if you drew close to the limit.
- Easy to misuse, since repeated draws with no repayment plan can slide into a debt cycle.
- Variable rates mean payments can rise, so cost can climb with market rates even if your balance holds steady.
- Smaller limits than loans, so a line rarely covers one large purchase as a term loan can.
Do
- Do compare the total cost, not only the headline rate, since fees change what you end up paying.
- Do ask how the rate is expressed, since APR, factor rate, and simple interest are not directly comparable.
- Do match the product to the need, using a loan for one purchase and a line for ongoing costs.
- Do read the renewal terms before you sign, including what triggers a review and what happens if you miss one.
- Do keep a repayment plan for every draw, so you know when each pull gets paid off.
- Do ask about a personal guarantee upfront, since it can put personal assets at risk if the business defaults.
Don't
- Don't draw the full limit to have it on hand, since idle balances still accrue interest and fees.
- Don't assume every lender's draw period works the same, since some convert automatically and others require a new application.
- Don't skip the fine print on fees, since a low rate can hide a fee that changes the real cost.
- Don't treat a line of credit as free money, since every draw is still debt that accrues interest.
- Don't confuse a soft credit check with the hard pull a full application triggers, since assuming they are the same can leave you with more credit inquiries than you expected.
- Don't wait until a cash crunch to apply, since approval takes time and lenders prefer steady finances.
Mistakes to Avoid
These mistakes show up again and again in how businesses use a term loan or a line of credit, each with its own cost.
- Comparing APR to a factor rate without converting them — as an illustration, a 1.2 factor rate on a 6-month loan works out to roughly 40% on an annualized basis, so lining it up against an APR without converting first hides how much more one option truly costs.
- Overlooking a UCC blanket lien on a secured line — some lenders can then claim any business asset as collateral, not only the one tied to the financing, which limits your ability to borrow elsewhere later.
- Ignoring the draw period's end date — once it passes, the balance often converts into a short-term loan due back in as little as six months.
- Skipping fees when comparing offers — a lower rate with higher fees can cost more overall than a higher rate with none.
- Sizing a term loan on a rough guess — borrowing more than the project needs means paying interest on cash that sits idle.
- Missing that many lines carry a personal guarantee — a business bankruptcy does not erase this personal debt, so the owner stays liable for the balance.
- Assuming approval odds are the same across lenders — online lenders often approve thinner credit files that banks decline, usually at a much higher rate.
- Letting a line of credit renew without review — rates, limits, and fees can change at renewal, and skipping the review can lock in worse terms.
What to Do Next
Work through these steps in order before you apply for either product.
- Total the exact amount you need and whether it is a one-time cost or a recurring one, since that answer points you toward a loan or a line.
- Pull your business credit report and your personal credit score, since both typically factor into approval and pricing.
- Gather two years of financial statements and your most recent tax return, which most lenders require to underwrite a loan or a line.
- Request rate quotes from at least three lenders, including one bank and one online lender, so you can compare offers side by side.
- Convert every quote to the same format, APR to APR or factor rate to APR, before you judge the total cost.
- Read the draw-period and renewal terms in writing, and ask what happens to your rate and balance when the draw period ends.
- Talk to an accountant or a loan officer about your cash flow before you sign, especially if a personal guarantee or collateral is involved.
Frequently Asked Questions
Can you have a business loan and a line of credit at the same time?
Yes. Many businesses hold both, using a term loan for a large purchase and a line of credit for day-to-day cash flow, since each product serves a different job rather than competing for the same expense.
Does opening a business line of credit hurt your credit score?
It can, for a short time. Applying triggers a hard credit check that may dip your score a few points. A high balance against your limit can also weigh on it, though on-time payments help it recover.
What credit score do you need to qualify for a business line of credit?
It varies by lender. Many lenders set minimum credit score requirements somewhere in the 600s for a line of credit, with individual lender minimums published on comparison sites ranging from the low 600s to around 700 depending on the product, as of 2026.
Is a business line of credit secured or unsecured?
Either, depending on the lender. A secured line uses equipment or property as collateral and usually carries a lower rate. An unsecured line skips collateral but often comes with a higher rate and a smaller limit.
Do you pay interest on a line of credit if you never draw from it?
No, not interest. You typically owe no interest on an undrawn balance. Many lenders still charge an annual or monthly fee solely for keeping the line open.
Can a startup qualify for a business line of credit?
Yes, in some cases. A handful of online lenders approve businesses with as little as three months of operating history and modest revenue, though limits and rates run less favorable than for an older business.
What's the difference between a business line of credit and a business credit card?
They work alike but price risk differently. Both let you borrow, repay, and reborrow, but business credit cards carry higher rates and suit small, everyday purchases better than large draws.
How long does it take to get approved for a business loan versus a line of credit?
Lines of credit are usually faster. Many online line-of-credit applications get a decision within one to three business days. Term loans, especially from banks, can take one to several weeks to fund.
Can you pay off a business term loan early without a penalty?
It depends on the lender. Some term loans carry a prepayment penalty or charge the remaining scheduled interest. Others allow early payoff free of charge, so confirm this term before you sign.
What happens when a line of credit's draw period ends?
The balance usually converts to a term loan. You stop being able to draw new funds, and the balance shifts into a fixed repayment schedule. That schedule can run as short as six months with some online lenders, though banks often allow more time.
Is a factor rate the same as an APR?
No. A factor rate is a simple multiplier applied to the amount borrowed. An APR reflects the yearly cost including fees, so a factor rate needs converting before you compare it to a loan's APR.
Does a personal guarantee apply to both business loans and lines of credit?
Yes, often. Many lenders require a personal guarantee on either product, especially for a newer or smaller business. That means you stay personally responsible for the balance even if the business closes.