Term Loan vs Line of Credit

Apply for a specific loan amount, receive full amount at closing, make fixed monthly or weekly payments, pay principal + interest until fully repaid.

• Pros: Predictable fixed payments, lower rates than lines of credit, larger loan amounts available, longer repayment terms (12-36 months), good for one-time large expenses.
• Cons: Must repay entire amount even if needs change, not reusable (need new loan for more funds), more documentation required, origination fees typically 2-5%.

Get approved for a credit limit, draw only what you need when you need it, pay interest only on drawn amount, as you repay credit becomes available again.

• Pros: Pay interest only on what you use, revolving access throughout term, flexible for fluctuating needs, fast approval and funding, less documentation than term loans.
• Cons: Higher interest rates (12-45%), shorter terms (6-24 months), lower credit limits than term loans, may have draw fees or maintenance fees, can be tempting to over-borrow.

Choose a Term Loan if you:

• Need a large amount ($50k+)
• Have a specific one-time expense (equipment, expansion, acquisition)
• Want predictable fixed payments
• Can afford longer commitment (2-5 years)
• Prefer lower interest rates

Choose a Line of Credit if you:

• Have fluctuating or seasonal cash flow
• Need ongoing access to working capital
• Want to pay interest only on what you use
• Need flexibility for multiple expenses
• Want a financial safety net

Example 1: Restaurant Expansion
Scenario: A restaurant owner needs $150k to open a second location. Costs are known upfront (build-out, equipment, initial inventory).
Best choice: Term Loan — One-time expense, large amount, predictable repayment. Lock in fixed rate over 3-5 years.

Example 2: Seasonal Retail Business
Scenario: A retail store needs to stock inventory before holiday season but cash flow is tight. Revenue will spike in Q4.
Best choice: Line of Credit — Draw for inventory, repay with holiday sales, reuse for next season. Flexible and cost-effective.

Example 3: Construction Company Growth
Scenario: A contractor has multiple projects but waits 30-60 days for client payment. Needs to cover payroll and materials upfront.
Best choice: Line of Credit — Ongoing cash flow gaps. Draw as projects start, repay when clients pay, repeat. Revolving access is key.