A business line of credit and a business loan solve different problems — but they get confused constantly, and small business owners end up with the wrong product for their actual needs.
If you're trying to cover recurring cash flow gaps, a term loan can trap you paying interest on money you don't need. If you're financing a one-time expansion or equipment purchase, a line of credit gives you flexibility you may not use.
This guide walks through what each product actually does, when each one makes sense, what they cost, and how to figure out which is the right fit for your business.
TL;DR: A business line of credit gives you a revolving limit you draw from as needed — you only pay interest on what you use. A business loan gives you a lump sum with fixed monthly payments. Lines of credit are better for ongoing cash flow needs. Loans are better for one-time investments. You can have both simultaneously. A broker like Berkman Financial can show you both options side by side from our funder network, so you pick the right one for your situation.
What is a business line of credit?
A business line of credit is a revolving credit facility — think of it as a reservoir of capital you can draw from whenever you need it, repay, and draw again. You only pay interest on the amount you have outstanding, not on the full credit limit.
Here is how it works in practice: say you are approved for a $100,000 line of credit. You draw $25,000 in March to cover a slow month. You repay $15,000 in April when revenue picks up. Now you owe $10,000 and have $90,000 available to draw. In May, you draw another $40,000 for inventory ahead of summer. You are now using $50,000 of your $100,000 limit, and you pay interest only on that $50,000.
Key characteristics:
- Revolving — draw, repay, repeat
- Interest accrues only on the outstanding balance
- No fixed end date (as long as the line remains open)
- Typically unsecured for smaller limits, secured for larger amounts
- Available through banks, credit unions, and alternative funders
A line of credit is flexibility. You do not know exactly when you will need it or how much, but you want it available.
What is a business term loan?
A business term loan is a lump sum of money delivered to your business at once, repaid in fixed monthly payments over a set period — typically one to five years.
Here is how it works: you borrow $100,000 at 10% APR over three years. Your monthly payment is approximately $3,227, and you pay a total of about $116,160 over the life of the loan. The amount borrowed, the interest rate, the monthly payment, and the payoff date are all fixed from day one.
Key characteristics:
- One-time lump sum disbursement
- Fixed monthly payments for a set term
- Interest calculated on declining balance
- Often requires collateral for larger amounts
- Available through banks, SBA lenders, and alternative funders
A term loan is certainty. You know exactly how much you are getting, what you will pay each month, and when it will be done.
Business line of credit vs. business loan: side-by-side comparison
| Feature | Business Line of Credit | Business Term Loan |
|---|---|---|
| How you receive funds | Draw as needed, up to a limit | Lump sum, all at once |
| Repayment structure | Pay interest on amount used | Fixed monthly payments |
| Revolving | Yes — repay and draw again | No — one-time disbursement |
| Best for | Ongoing, recurring, or unpredictable needs | One-time investments or purchases |
| Interest charged on | Outstanding balance only | Full loan amount (declining) |
| Collateral | Often unsecured under $250K | Often required |
| Typical terms | 6–24 months revolving | 1–5 years fixed |
| Speed to fund | 2–7 days (initial approval) | 1–8 weeks |
| Cost | 8–24% APR typical | 6–20% APR typical |
Neither product is built for speed. If you need same-day capital with flexible repayment tied to daily sales, a merchant cash advance might fit better.
When a business line of credit makes sense
A line of credit shines when your capital needs are recurring, variable, or unpredictable. Specific scenarios:
- Seasonal cash flow gaps. Your restaurant is slow in January and February but packed May through September. A line of credit bridges the slow months without locking you into payments during peak season.
- Payroll smoothing. Revenue comes in unevenly, but payroll is due on a fixed schedule. Draw against the line when cash is short, repay when receivables come in.
- Inventory purchases. A supplier offers a 10% discount on a bulk order, but you need $30,000 now. Draw from the line, stock up, and repay as you sell.
- Emergency expenses. An HVAC unit fails, a key piece of equipment breaks, or an insurance premium comes due early. Having an open line means you do not scramble for funding.
- Covering accounts receivable gaps. B2B businesses that invoice on NET 30/60/90 terms often use a line of credit to cover the gap between delivering a service and receiving payment.
The common thread: you do not need all the money at once, you do not know exactly when you will need it, and you want to pay interest only on what you actually use.
When a business loan makes sense
A term loan is the right choice when you have a specific, one-time use for a defined amount of capital.
- Equipment purchases. A new truck, a commercial oven, a CNC machine — a known cost for a known asset. A term loan locks in the payment and lets you budget predictably.
- Real estate or renovation. Buying commercial property or building out a new location. Large, one-time expenditures with long payback periods are best served by term loans with longer terms.
- Business acquisition. Buying an existing business or franchise. The acquisition cost is known, and a term loan provides the capital.
- Major expansion projects. Opening a second location, launching a new product line, or entering a new market. When the capital need is large and defined, a lump sum with structured repayment makes more sense than revolving credit.
- Debt consolidation. If you have multiple funding obligations with daily or weekly payments squeezing your cash flow, a term loan (or MCA consolidation) can combine them into a single, lower monthly payment.
The common thread: you know exactly how much you need, you need it all at once, and you want predictable monthly payments.
What each product costs (in plain English)
Business line of credit costs:
- APR typically ranges from 8% to 24% through alternative funders, and 6% to 15% through banks
- You pay interest only on the outstanding balance, not the full limit
- Some lines charge a maintenance fee or draw fee
- No interest accrues when you are not using the line
Business term loan costs:
- APR typically ranges from 6% to 20% depending on credit profile, collateral, and lender
- SBA loans can go as low as 6% to 10%
- Interest is calculated on the full loan amount (declining balance)
- Monthly payment is fixed and predictable
- Some loans include origination fees of 1% to 3%
How they compare on a $100,000 example:
A $100,000 line of credit at 15% APR where you use an average of $50,000 over the year costs approximately $7,500 in interest.
A $100,000 term loan at 12% APR over two years costs approximately $12,700 in total interest — but you have the full $100,000 from day one.
For businesses that only need capital intermittently, a line of credit is cheaper because you only pay for what you use. For businesses that need the full amount upfront, a term loan is more cost-effective because the structured payments keep total interest lower than carrying a large line balance over time.
For a full comparison of all capital products — including MCAs, revenue-based funding, and invoice financing — visit our products page.
Qualification requirements: LOC vs. term loan
| Requirement | Line of Credit | Term Loan |
|---|---|---|
| Credit score (bank) | 680+ | 680+ |
| Credit score (alternative) | 580+ | 600+ |
| Time in business | 6–12 months | 12+ months |
| Annual revenue | $100K+ typical | $100K+ typical |
| Collateral | Usually not required under $250K | Often required |
| Documentation | Bank statements, basic financials | Tax returns, financials, business plan |
Alternative funders — accessible through a business loan broker — have lower qualification thresholds than banks. If you have been declined for a bank line of credit or term loan, alternative products may still be available through Berkman Financial's funder network.
How brokers help you pick the right product
The line-of-credit-vs.-loan decision is exactly the kind of decision a broker adds the most value to. Here is why:
- You describe the problem, not the product. When you tell a bank you want a line of credit, they evaluate you for a line of credit — even if a term loan would actually fit better. When you tell a broker your situation, they recommend the right product.
- You see both options side by side. Berkman Financial's funder network includes line of credit and term loan providers alongside MCA and revenue-based options. You see competing offers across product types, not just within one.
- Your advisor explains the tradeoffs. A named Berkman advisor walks you through the cost, flexibility, and cash flow impact of each option. If a line of credit is wrong for your situation, we say so — even if it means recommending a cheaper bank product.
We have funded over $525 million across 10,000+ businesses since 2015. Most of our work is helping business owners pick the right product — not just getting them approved for one.
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Common questions about business lines of credit vs. business loans
Is a business line of credit cheaper than a business loan?
It depends on how you use it. If you only draw a portion of your line intermittently, you pay less total interest than you would on a term loan for the same amount. But if you draw the full line and carry a balance for the full term, a term loan with a lower APR would be cheaper. The line of credit's advantage is flexibility — you pay only for what you use.
Can I have both a business line of credit and a business loan?
Yes. Many businesses carry both — a term loan for a specific investment and a line of credit for ongoing cash flow needs. As long as your total debt service fits within your monthly cash flow, having both products simultaneously is common and often the smartest approach.
Which is easier to qualify for — LOC or business loan?
Lines of credit are generally slightly easier to qualify for, especially at smaller amounts, because they are often unsecured and the lender's exposure is limited to what you draw. Term loans for larger amounts may require collateral. Through alternative funders, both products are accessible to businesses with credit scores of 580+ and six or more months in business.
What credit score do I need for a business line of credit?
Bank lines of credit typically require 680+. Through alternative funders in Berkman Financial's network, lines of credit are available with credit scores as low as 580. Revenue, time in business, and cash flow consistency matter more than credit score for alternative products.
Can I use a business loan to open a line of credit?
These are separate products — you do not use one to open the other. But you can apply for both simultaneously. A term loan gives you a lump sum for a specific purpose, and a line of credit gives you ongoing access for variable needs. Your broker can help you apply for both at once.
What's the difference between a business line of credit and a business credit card?
A business credit card is a type of revolving credit, similar in concept to a line of credit, but typically with lower limits ($5,000 to $50,000), higher APRs (15% to 25%+), and restricted to card-based purchases. A business line of credit provides cash directly to your bank account, has higher limits, and can be used for any purpose — including payroll, rent, and vendor payments that do not accept cards.
