A business term loan usually provides a lump sum that is repaid on a fixed schedule. A business line of credit sets a limit the company can draw from, repay, and potentially use again under the agreement. The right structure depends on what the money funds and when cash returns to the business.
When a term loan fits
A term loan can suit a defined purchase or project with a measurable cost and useful life, such as equipment, a location build-out, or an acquisition. The repayment term should be consistent with the period over which the asset supports revenue. Financing a long-lived asset with debt that comes due too quickly can create avoidable refinancing pressure.
When a line of credit fits
A line can support recurring, short-term working-capital needs such as inventory before a seasonal sale or receivables that arrive after payroll. Interest is generally charged on the amount drawn, but the agreement may also include annual, maintenance, draw, or unused-line fees.
Credit lines can change
A line is not permanent cash. The lender may review it periodically, require updated financial statements, reduce the limit, decline a renewal, or impose conditions after business performance changes. Do not rely on the full undrawn amount as the only emergency reserve.
Compare contract details
- Fixed or variable pricing, index, and margin
- Draw period, renewal date, and maturity
- Minimum draw and repayment rules
- Annual, maintenance, transaction, and late fees
- Collateral and personal guaranty
- Financial covenants and reporting requirements
- Default triggers and lender setoff rights
Use a borrowing base carefully
Some lines are limited by eligible receivables or inventory. The available amount can shrink when customers pay late, invoices age, or inventory becomes ineligible. Understand reporting frequency and how disputes, returns, or customer concentration affect availability.
Model a slow season
Build projections for expected revenue, a delayed-receivables case, and a material sales decline. Include tax payments, payroll, insurance, and debt service. A line should bridge a timing mismatch, not repeatedly cover a business model that loses money each month.
Before choosing, compare total cost, payment timing, flexibility, and the consequence of nonrenewal. The best facility gives the business enough room to operate without making repayment depend on an optimistic forecast.