The difference in a line of credit vs term loan comes down to how the money arrives and what you pay for. A term loan pays one lump sum that you repay in fixed installments over a set number of years, with interest on the whole amount from the day it funds. A line of credit gives you a limit you draw from when you need it, repaid weekly or monthly, and you pay only on the part you have drawn. Lines fit costs that come and go, and term loans fit one large purchase you will use for years. Through Today Capital Group, lines of credit go up to $250,000 with offers often within a day, and term loans come through our SBA-equivalent and bank partners and take a few weeks.
Line of credit vs term loan at a glance
The table compares a term loan vs line of credit on the points owners ask about most.
| Line of credit | Term loan | |
|---|---|---|
| How it pays out | An approved limit you draw from as needed | One lump sum at closing |
| How it is repaid | Weekly or monthly payments on what you have drawn, and repaid room can be drawn again | Fixed monthly installments of principal and interest until the balance reaches zero |
| What you pay for | Only the drawn balance, priced per program as a fee per draw or interest on the balance | Interest on the full amount from the day it funds, falling as the balance is paid down |
| Typical use | Recurring or unpredictable costs such as stock, payroll, materials and slow-paying customers | One large need with a long life, such as equipment, a buildout, real estate or refinancing |
| Amounts we place | Up to $250,000 | Through SBA-equivalent and bank partners, sized by the partner |
| Speed through us | Offers often within a day | Weeks |
| Main documents | A short application and recent business bank statements | Tax returns, a personal financial statement and a debt schedule |
How each one pays out and is repaid
Term loans
A term loan is an installment loan, so the installment loan vs line of credit question is the same comparison under another name. The lender sends the full amount at closing, and you repay it in equal payments on a fixed schedule. Each payment covers that month's interest plus a slice of principal, so the balance falls every month until it reaches zero. The SBA's 7(a) loans page describes its own program the same way, noting that most 7(a) term loans are repaid with monthly payments of principal and interest from the business's cash flow.
Terms run for years. The SBA's program comparison for lenders sets 7(a) maturities at 10 years or less, unless the money finances real estate or equipment with a useful life beyond 10 years, and up to 25 years for real estate. That long schedule keeps the monthly payment low enough to carry a large purchase. A term loan does not refill, so if you need more later, you apply again.
Lines of credit
A line of credit starts with an approved limit and no money moving. When a cost comes up, you draw what you need into your business account. Through the programs we place, each draw is repaid weekly or monthly, and as you pay it down, that room opens up to draw again without a new application. Lenders call this revolving credit. Our post on how a business line of credit works and how to qualify covers draw periods, renewals and requirements in more depth.
How the cost works: drawn balance vs full amount
The biggest difference in cost is the base the price is charged on. A term loan pays you the whole amount on day one, so interest runs on all of it from day one, spent or not, and shrinks only as the principal is repaid.
On a line of credit, the price applies to what you have drawn and only while it is out. The SBA's lender page says, "With a line of credit, interest is only charged when the loan is in use." A business with a $100,000 line and $15,000 drawn pays on $15,000, and the untouched $85,000 usually costs nothing to keep open, though some programs charge a maintenance or annual fee, so ask.
Lines are priced per program, and the method matters as much as the price. Some programs charge interest on the outstanding balance, so paying a draw back sooner lowers the cost. Others charge a set fee on each draw, which stays the same however quickly you repay unless the program discounts early payoff, and some do. Per dollar, a bank or SBA-equivalent term loan is usually the lowest-cost money for a business that qualifies, while a line is priced for speed and flexibility, so the total depends on how much you need and for how long.
A worked example with $75,000
Take a business that expects a $30,000 supplier bill in week 2 and $45,000 of payroll during a slow stretch in week 11, and expects to recover both from sales within a few months. The figures are an illustration, not a quote, and the term loan rate is an example.
Option 1: a $75,000 term loan
Say the business borrows $75,000 up front at an example 10% interest rate over 5 years with monthly payments. The standard amortization formula, the one taught in college math texts such as this open textbook chapter on amortized loans, gives the payment:
Monthly payment = P × i ÷ (1 − (1 + i)^−n)
P is the amount borrowed ($75,000), i is the monthly rate (10% ÷ 12 = 0.008333) and n is the number of payments (60). (1.008333)^−60 is about 0.6078, so the bottom of the fraction is about 0.3922. The top is $75,000 × 0.008333 = $625. Dividing $625 by 0.3922 gives about $1,593.53 a month.
- Over 60 payments the business repays about $95,612, so the interest comes to about $20,612.
- In the first six months, about $3,628 goes to interest, and about $69,066 is still owed after the sixth payment even though both bills are long paid.
Option 2: a $100,000 line of credit
Now the same business opens a $100,000 line, as in the chart above. It draws $30,000 in week 2 and pays it down $2,500 a week, then draws $45,000 in week 11 and pays down $5,000 a week until the balance is zero in week 22. Across the 24 weeks, the drawn balance averages $21,250.
The line's cost is whatever its program charges on that drawn money, either interest on an average balance of $21,250 or a fee on each of the two draws. The term loan keeps $69,000 to $75,000 outstanding for the same six months, more than three times as much, and carries a balance for four and a half more years. The line does ask for larger payments while each draw is out, and the term loan's 60 small payments are the right shape for a $75,000 machine that will earn money for years. The usual rule is to match the length of the financing to the life of what it pays for.
The amounts we place for each
Through Today Capital Group, business lines of credit go up to $250,000, repaid weekly or monthly on what you have drawn, with offers often within a day. Term loans come through our partners as SBA-equivalent and bank loans, which are long-term loans with monthly payments where the partner sets the amount, rate and term. Our SBA-equivalent loans sit outside the SBA program, so they can even be used to pay off existing advances.
One application covers both. We send your file to the funders and partners that fit it, and offers come back side by side before you sign anything. There is nothing to pay to apply or to see offers.
Speed and what lenders check
In the business term loan vs line of credit decision, the paperwork and the wait differ as much as the price. A line through our network usually needs a short application and recent business bank statements. Funders weigh revenue first, because your deposits have to carry the payment on a fully drawn line, and credit counts for more than it does on a revenue-based advance. Most funders prequalify from bank statements and a soft credit pull.
A term loan through a bank or SBA-equivalent partner asks for two to three years of tax returns, a personal financial statement and a debt schedule. The partner weighs profit, credit history, time in business, existing debt and collateral, which is why it takes weeks.
The Federal Reserve's 2025 Small Business Credit Survey report on employer firms shows how the two compare. Of business line of credit applicants, 47% were fully approved and 24% were denied, while 39% of business loan applicants were fully approved and 32% were denied. Among firms denied some or all of what they asked for, 41% said they already had too much debt, up from 22% in 2021, so check your debt schedule before applying for a large term loan.
Every funder sets its own thresholds. The funders we work with generally look for about a year in business and about $20,000 a month in deposits. If you're not there yet, apply anyway. Some funders work with newer or smaller businesses, and we'll tell you what's realistic.
When to choose a line of credit
A line fits when the need repeats or its timing is hard to predict. A restaurant restocking every few weeks, a contractor buying materials for each job, or a firm whose customers pay on 30 to 60 day terms can draw for the gap and repay when the money comes in, paying only for the weeks it was out. If you are sizing one known working capital need, our guide to working capital loans shows how to work out the gap before you borrow.
When to choose a term loan
A term loan fits one large purchase that will pay for itself over years, such as equipment, a second location, a buildout, a building or a business, or refinancing debt onto a longer schedule. Spreading the cost over 5 to 10 years keeps the payment small against the revenue the purchase brings in, and a fixed rate keeps the payment the same. It suits owners who can wait a few weeks and have the tax returns and credit history a partner will review. For a cost that recurs every month it fits less well, since interest runs on the full amount while it waits to be spent.
When to use both
A business can carry one of each, and the two do different jobs. A business that buys a $150,000 machine with a seven-year term loan can keep a $50,000 line open for the extra materials and payroll that larger jobs bring, then repay each draw as those jobs pay out. Because a term loan takes weeks and looks hard at existing debt, it usually makes sense to close the term loan first and add the line after.
Where revenue-based financing fits instead
Revenue-based financing, also called a merchant cash advance, suits owners who need one lump sum quickly. A funder buys a set amount of your future sales up front, sized on your usual revenue and repaid through a set daily or weekly payment. Through us it runs from $5,000 to $2,000,000, is decided mainly on four months of bank statements, and is typically funded within one to two business days of choosing an offer. It fits one need with a clear payoff, such as stock ahead of a busy season, when a line is too small or a term loan too slow, and its factor rate fixes the total payback in dollars before you sign. Our comparison of a merchant cash advance vs a business loan covers it against a term loan, and our guide to short-term business loans compares it with other financing repaid within months.
How to compare a line and a term loan through us
Ask for a line for a recurring or short-lived cost and a term loan for a long-lived purchase, and if you are not sure, say so on the application and we will bring back both where your file fits. The application is a short form plus four months of business bank statements, uploaded or shared through a read-only connection. You can apply online in a few minutes or call us at (818) 351-0225 to talk it through first.
Line of credit vs term loan questions
What are the key differences between a line of credit and a term loan?
A term loan pays one lump sum up front and is repaid in fixed monthly installments over a set number of years, with interest on the full amount from the day it funds. A line of credit gives you a limit to draw from as needed, repaid weekly or monthly, and you pay only on what you have drawn, with repaid room available to draw again. Through us, lines go up to $250,000 with offers often within a day, and term loans through partners take weeks.
Should I do an installment loan or a line of credit?
Choose an installment loan, such as a term loan, when you need one large amount for something that will earn money for years, like equipment or a buildout, and want a fixed payment over a long term. Choose a line of credit when costs repeat or arrive at unpredictable times, such as inventory, payroll gaps or slow-paying customers, because you draw only what you need and pay only while it is out. You can also use both, one for the big purchase and one for day-to-day cash.
Does a line of credit count as a loan?
Yes, a line of credit is borrowed money you repay with interest or fees, so it counts as debt. Lenders classify it as revolving credit because the limit refills as you repay, while a term loan is installment credit paid out once and paid down to zero. The undrawn part is not owed until you draw it.
What are the downsides of a line of credit?
A line usually costs more per dollar than a long-term bank or SBA-equivalent loan, because it is priced for speed and for the lender's promise to fund future draws. Each draw is repaid over weeks or months, so payments run larger than on a multi-year loan. Some programs charge a fee per draw that stays the same when you repay early, so compare the dollar cost of a typical draw and ask about early payoff discounts.
How long is a business loan term?
It depends on the loan. Bank and SBA-equivalent term loans usually run for several years with monthly payments, and in the SBA's own 7(a) program, maturities run up to 10 years, or up to 25 years for real estate. Short-term loans and revenue-based financing are repaid over months, and each draw on a line is repaid on its own schedule while the line stays open. For SBA-equivalent loans through our partners, the partner sets the term.
