# Business loan versus line of credit

Source: https://businessloanbroker.ai/compare/loan-vs-line-of-credit/
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> Business loan versus line of credit: a term loan for one planned purchase, a line for recurring gaps. Amounts, cost, speed, qualification and an example.

Choose a term loan when you have one planned purchase with a known cost, such as an expansion, a buyout or a large piece of equipment. Choose a line of credit when you need money repeatedly for timing gaps, such as covering payroll while invoices clear or buying inventory ahead of a season. A loan is cheaper per dollar for a long term need; a line is cheaper when you only need the money for weeks at a time.

## Key facts
- **Term loan:** Lump sum, fixed payments, 1 to 10 years, typically 7% to 30% APR
- **Line of credit:** Draw and repay as needed, interest only on what you use, typically 8% to 60% APR
- **Choose a loan when:** The amount and purpose are fixed and you will need years to repay
- **Choose a line when:** The need repeats and each use lasts weeks or a few months

## What is the difference?

A [term loan](https://businessloanbroker.ai/business-loans/term-loans/) gives you the full amount at once and you repay it in equal installments until it is gone. Interest accrues on the whole balance from day one. A [line of credit](https://businessloanbroker.ai/business-loans/line-of-credit/) gives you a limit you can draw against, repay and draw again; you pay interest only on the amount outstanding, and the line stays open for a year or more.

Loans are usually larger and longer. Lines are usually smaller, variable rate, and reviewed annually. Banks offer both to established businesses; online lenders offer both with looser criteria and higher rates. Both typically require a personal guarantee.

## When is a term loan the better choice?

When you know the amount, the purpose and that you will need years to repay. Buying equipment, opening a second location, acquiring a business or refinancing expensive debt all fit a loan, because the asset or the savings last as long as the payments. A fixed payment also makes budgeting simple, and a fixed rate protects you if rates rise.

A loan is also the better choice when you want the longest term and lowest rate available, since [SBA 7(a) loans](https://businessloanbroker.ai/business-loans/sba-7a-loans/) and bank term loans run to ten years or more. The downside is that you pay interest on the whole amount whether or not you have used it yet.

## When is a line of credit the better choice?

When the need is recurring and short. If you regularly wait 45 days to be paid while payroll is due every two weeks, a line covers the gap each cycle and costs you interest only for those weeks. Seasonal businesses use a line to buy inventory before the season and repay it from sales.

The downsides are variable rates, annual renewals that can be cut back if your numbers weaken, and the temptation to treat a line as permanent money. A line that stays fully drawn for a year should probably have been a loan. [Cash flow gap financing](https://businessloanbroker.ai/situations/cash-flow-gap/) covers the typical uses.

## What do they cost side by side?

Say you need up to $100,000. A $100,000 term loan at 12% over three years costs about $3,321 a month, and about $19,572 in interest over the term. You pay that whether you use all the money in month one or let half of it sit.

A $100,000 line of credit at 14% costs nothing while undrawn, apart from any annual fee. If you draw $40,000 for four months and repay it, the interest is about $1,867. Draw that same $40,000 three times a year and you pay about $5,600 a year, still far less than the loan, because you only pay for the weeks you use.

## Can you use both?

Yes, and many established businesses do: a term loan for the planned purchase and a line for day to day timing. Lenders generally allow it as long as your cash flow covers both payments and the collateral does not overlap in a way the first lender objects to. If one lender holds a blanket UCC lien, the second lender will usually ask it to subordinate or carve out the collateral it needs.

The order matters. Getting the line first, while your bank statements are clean and you do not urgently need it, is easier than applying for one during a crunch.

## How do you apply?

Apply once here and your application is matched to lenders offering both products, so you can compare a term loan offer with a line of credit offer side by side before you decide. It is free for your business; lenders pay us when a loan funds. Have three to six months of bank statements ready, and for larger amounts, two years of tax returns and current financial statements; the [document checklist](https://businessloanbroker.ai/guides/document-checklist/) has the full list.

If you prefer, ask your AI assistant to prepare and submit the application for you through our MCP server; it can lay out the loan and line offers on the same five lines. See the [agents hub](https://businessloanbroker.ai/agents/).

|  | Term loan | Line of credit |
|---|---|---|
| Typical amounts | $25,000 to $5 million | $10,000 to $1 million |
| Typical cost | 7% to 30% APR, often fixed | 8% to 60% APR, usually variable, plus draw or annual fees |
| Speed | Days online, 2 to 8 weeks at banks | Days online, 2 to 6 weeks at banks; draws in a day |
| Qualification bar | 1 to 2 years in business, 600 to 680 credit, DSCR 1.25 at banks | 6 to 12 months online, 600 to 680 credit, steady deposits |
| Best for | One planned purchase with a known cost | Recurring gaps, seasonal inventory, a safety net |

## Questions and answers
**Is a line of credit cheaper than a loan?**

Per dollar per day, the rate on a line is often a little higher. In practice a line is cheaper when you only need money for weeks at a time, because you pay interest only on what you draw. A loan is cheaper when you need the full amount for years, because the rate is lower and often fixed.

**Can I get a line of credit with under a year in business?**

Online lenders typically open lines for businesses with six to twelve months of deposits and a personal credit score of 600 or more. Banks usually want two years. Limits are smaller for younger businesses, and the line is reviewed as the business matures.

**Can I convert a line of credit into a term loan?**

Often, yes. Many banks let you term out a drawn balance into a fixed payment loan, and refinancing a drawn line into a term loan or SBA loan is common. If your line has been fully drawn for a year, that is usually the right move, because it lowers the rate and stops the annual renewal risk.

**Does an unused line of credit cost anything?**

Sometimes. Banks may charge an annual fee or an unused line fee of a fraction of a percent. Online lenders often charge nothing until you draw, then add a draw fee. Read the term sheet for both.

## Related
- [Business term loans](https://businessloanbroker.ai/business-loans/term-loans/)
- [Business lines of credit](https://businessloanbroker.ai/business-loans/line-of-credit/)
- [Covering a cash flow gap](https://businessloanbroker.ai/situations/cash-flow-gap/)
- [Business loan payment calculator](https://businessloanbroker.ai/tools/business-loan-calculator/)
- [How to get a business loan](https://businessloanbroker.ai/guides/how-to-get-a-business-loan/)

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