Business Line of Credit vs Term Loan: Which One Fits Your Business?
Business line of credit vs term loan: which one fits your business?
They sound similar. They price similarly on paper. But a business line of credit and a term loan solve totally different problems — and using the wrong one is one of the most expensive mistakes an operator can make.
Here's the honest breakdown.
The core difference in one sentence
A term loan is a lump sum you pay back on a fixed schedule. A line of credit is a revolving limit you draw from, repay, and draw from again — like a business credit card without the retail markup.
When a term loan is the right call
Term loans work best when the use of funds is one-time and defined:
- Buying out a partner
- Financing a specific equipment purchase (though equipment financing usually beats it)
- Funding a buildout for a second location
- Refinancing higher-cost debt into a longer, cheaper structure
- Any project with a clear start, end, and ROI you can model
The math is predictable: one wire in, fixed monthly (or weekly) payments out, done on a set date. If you know exactly what the money is for and exactly what you'll do with it, a term loan is usually the right structure.
When a line of credit is the right call
Lines of credit are built for cash flow gaps and opportunistic capital:
- Covering payroll during a slow month
- Buying inventory ahead of a busy season
- Bridging a gap between a delivered invoice and the day it gets paid
- Taking advantage of a bulk-order discount from a supplier
- Emergency repairs
The key benefit: you only pay interest on what you actually draw. If you have a $100K line and you only pull $12K, you're paying on $12K. When you pay it back down, that capacity opens back up automatically.
For most established businesses, a line of credit is the single most useful piece of financial infrastructure you can have — it costs nothing to sit unused, and it turns "we can't afford to say yes" into "let me check the line."
Qualifying — the honest reality
Lines of credit generally require stronger files than term loans and revenue-based products:
- Longer time in business (12+ months typical)
- Higher monthly revenue
- Cleaner credit
- More consistent deposits
If your file doesn't qualify for a line yet, a revenue-based product or term loan can bridge you now while you build toward line-of-credit eligibility.
Cost comparison — apples to apples
- Term loans: usually quoted as APR. Simple to compare.
- Lines of credit: quoted as APR or a draw fee + monthly rate. Effective cost depends on how often you draw and how fast you pay back.
- Revenue-based / MCA: quoted as a factor rate, not APR — and the effective APR is usually meaningfully higher than either of the above, in exchange for speed and looser qualifying.
Never compare a factor rate to an APR directly. They aren't the same math. A good broker will walk you through effective cost on the actual amounts and terms you're being offered.
Can you have both?
Yes — and many well-run businesses do. A term loan handles a defined project. A line of credit stays open as your safety net. The two products complement each other and don't cannibalize approval odds when structured right.
Which one to ask for
- Have a specific project? → Term loan.
- Want a safety net or cash flow tool? → Line of credit.
- Not sure yet, and revenue is under $30K/month? → Start with a revenue-based product to get moving now, then graduate into a line as your file strengthens.
Bottom line
The "which product?" question is really a "what problem?" question. DADDYS BANK is a brokerage — we shop your file across our lender network and match you with the structure that actually fits, not the one that pays us the most. Start a deal and we'll come back with a real recommendation, not a sales pitch.