Term loan vs line of credit: which one actually fits?
A term loan gives you a lump sum with fixed repayments. A line of credit gives you a limit you draw against, repay, and draw again. The right one depends on what the money is actually for.
The short answer: a term loan suits a single, defined purchase (you know the amount and you want it done), while a line of credit suits ongoing or unpredictable working capital, since you only pay interest on what you’ve actually drawn. Most businesses that ask this question already have a specific need in mind, and that need usually decides it for you.
What’s actually different between them?
A term loan is a lump sum you borrow and repay in fixed instalments over a set period, the most straightforward form of business finance there is. A line of credit is a revolving facility, the lender approves you to a limit, you draw down what you need, repay it, and the limit opens back up without a new application, something a fixed-repayment term loan can’t do.
That flexibility is also where a line of credit gets complicated. Not every facility on the market works the same way underneath, and what you’re allowed to use it for depends entirely on the lender, so read the usage terms before you sign either one.
You know the number and the purpose
Buying a specific piece of equipment, funding a one-off stock order, or covering a defined project cost. A fixed repayment schedule is simpler to plan around when the amount and purpose are already settled.
The need is ongoing or hard to predict
Smoothing wages and stock timing, covering seasonal gaps, or having a buffer ready without knowing exactly when or how much you’ll need. You only pay for what you draw.
| What matters | Term loan | Line of credit |
|---|---|---|
| Amount range | $10,000 up to $5,000,000+ | $20,000 to $1,000,000 |
| Structure | Lump sum, fixed instalments | Revolving limit, draw and repay |
| Security (under $250k) | Usually a director’s guarantee, sometimes a GSA alongside it | Similar tiering, varies by lender and limit size |
| Speed | Often 24 to 48 hours once paperwork is in | Varies by lender, comparable once approved |
| Best suited to | A single, defined purchase or cost | Ongoing or unpredictable working capital |
Do you need property security for either one?
Depends on the number, and it’s less black-and-white than most people expect. Under $250,000, security on a term loan is usually a director’s guarantee (your signature, not your house), and some lenders will lend right up near that mark with no property backing at all, you pay for that flexibility in the rate. Above $250,000, property security becomes more common, though some non-bank lenders will accept a caveat over property rather than a full second mortgage.
The same broad tiering applies to lines of credit, though the exact threshold and structure varies more by lender. Worth a real conversation rather than an assumption either way.
We’re filming a segment with one of our lending partners walking through exactly how they assess a term loan against a line of credit application for the same business. Once it’s up, it’ll sit here.
Choose a term loan if
- You’re funding a single, specific purchase
- You want a fixed repayment you can plan around
- You’d rather the facility close out on a known date
Choose a line of credit if
- Your cash needs move month to month
- You want a buffer ready without borrowing it all upfront
- You’re confident you’d read the usage terms before signing
Can you use both?
Yes, and plenty of businesses do. A term loan for a defined purchase (new equipment, a fit-out) sitting alongside a line of credit for day-to-day flexibility isn’t unusual, provided both facilities are structured to work together rather than compete for the same security. That’s exactly the kind of thing worth raising on the call before either application goes in.
Not sure which shape fits your business?
Tell us what the funding is for and we’ll tell you honestly whether a term loan, a line of credit, or something else entirely is the right call.
Frequently asked questions
