Business line of credit or term loan: which fits?

Choose between a business line of credit and a term loan by matching each actual agreement to the amount, timing and duration of the cash need. Compare complete draw, repayment, interest and fee schedules—and check that the next draw is still available when you need it. Neither label makes a weak repayment plan safe.

A line can fit recurring temporary gaps. A term loan can fit a defined amount carried over a stated repayment period. Those are starting possibilities, not automatic rules. The useful answer appears when the borrowing is placed beside the business's actual payments and collections.

Describe the need before choosing the product

Write what will be paid, when, how much cash is already assigned and which receipt would repay the borrowing. Ask whether the need genuinely returns to zero or whether the business is relying on new borrowing to replace old borrowing indefinitely.

The OCC's banking glossary describes a line of credit as authorization to borrow within a limit. That permission is different from money already disbursed. The credit-limit guide explains the separate limit, drawn balance, current availability and bank cash.

The SBA's 7(a) overview describes term-loan repayment and monitored working-capital lines within that particular program. Actual eligibility, rates and conditions need the lender's current terms. This guide compares invented agreements rather than recommending a lender or assuming you qualify for a program.

Keep the operating plan the same

Consider a fictional workshop with two customer offers for separate batches. It accepts each only after confirming the required funding and capacity. The first needs $8,000 paid on day zero and would collect $8,600 on day thirty. The second needs $6,000 paid on day sixty and would collect $6,500 on day ninety.

The first batch's complete cost is $4,000 materials, $3,000 paid production work and $1,000 administration and other job resources. The second is $3,000 materials, $2,000 paid production and $1,000 administration and resources. Production uses sixty and forty available paid provider hours respectively at an all-in $50 per hour. No required work is unpaid or counted twice.

Both deliveries can be completed before their stated collections without displacing existing work. The cash payments occur on the dates shown, including advance payment for the provider work. Together, the jobs collect $15,100 against $14,000 of operating payments, leaving $1,100 before financing.

There is $1,000 of opening cash available solely for this decision, after excluding other business and household obligations. No other receipts, payments, taxes, investment income or business costs enter this finite comparison. The collection dates are supplied assumptions, not assurances about actual customers.

Two different ways to carry those dates

Offer L is a revolving line with a $10,000 limit and a $100 fee paid on day zero. It charges exactly 1% of drawn principal for each thirty-day period, with interest payable at days thirty, sixty and ninety. There is no interest on an undrawn balance and no other fee. Every availability condition is met in the initial case, and principal repayments immediately restore capacity.

The line is committed through day ninety under the supplied conditions and must be cleared that day. For this calculation, interest has no compounding, daily variation or other adjustment. The period rate is an invented calculation term, not an APR or a market quotation.

Offer T advances $10,000 on day zero and charges a $50 fee then. It requires principal repayments of $2,000 on day thirty, $2,000 on day sixty and $6,000 on day ninety. Each thirty-day period charges 1% of its opening principal. No redraw, other fee or early-payoff alternative is supplied.

The comparison assumes no collateral or personal guarantee under either fictional offer. Real agreements may have important security, guarantee, covenant or default terms, which belong in the decision even when their consequences are not reduced to one number.

Follow the line through both gaps

On day zero, the workshop pays the $100 fee, draws $8,000 and pays the first job's $8,000 costs. Cash is $900 and drawn principal is $8,000. The $2,000 of remaining line capacity is not another bank balance.

On day thirty, it collects $8,600, pays $80 interest and repays the $8,000 principal. Cash becomes $1,420 and the drawn balance returns to zero. No interest is due at day sixty for the intervening undrawn period.

On day sixty, it draws $6,000 and pays the second job's costs, leaving cash at $1,420. On day ninety, it collects $6,500, pays $60 interest and clears the $6,000 principal. Closing cash is $1,860 and no debt remains.

Complete financing cost is $240: the $100 fee plus $140 interest. The $1,100 operating difference less $240 leaves $860, matching the increase from $1,000 opening cash to $1,860 closing cash. This result depends on the assumed deliveries, collections and continuing access.

Follow the term loan through the same jobs

The term loan supplies the full $10,000 immediately. After the $50 fee and first job's $8,000 payment, bank cash is $2,950. That larger initial balance comes with $10,000 of debt, not extra earnings.

Day-thirty interest is $100 on $10,000. After collecting $8,600 and paying $2,000 principal plus that interest, cash is $9,450. Principal falls to $8,000.

At day sixty, $80 interest and $2,000 principal are paid before the second job's $6,000 costs. Cash becomes $1,370 and principal falls to $6,000. There is no redraw needed or available under this quote.

On day ninety, the $6,500 receipt arrives before the $6,000 final principal and $60 interest payment. Cash closes at $1,810 with the loan cleared. Complete financing cost is $290: $50 fee plus $240 interest. The operating $1,100 less $290 leaves $810.

Same work, different financing schedules

Scroll across to compare the defined alternatives. Use the arrow keys when the table area is focused.

The line is $50 cheaper under these inputs. The term loan keeps more cash in the business at certain earlier points. Decide whether that timing and the actual access conditions matter enough to justify its extra cost; do not choose from the smaller fee alone.

Now make the first customer late

Change the line case so the first $8,600 does not arrive until day seventy-five. All interest dates remain unchanged. The initial $8,000 draw stays outstanding through day sixty.

Cash begins at $900 after the first job and fee. Day-thirty interest of $80 reduces it to $820; another $80 at day sixty reduces it to $740. Only $2,000 remains available under the $10,000 line limit.

The second job needs $6,000. Even drawing that entire $2,000 and using all $740 of bank cash leaves a $3,260 gap. If the owner keeps a separately chosen $500 reserve, only $240 of that cash can be released, and the gap becomes $3,760.

The second offer has not yet been accepted in this branch. The workshop must find an executable funded arrangement or decline before promising the work. It cannot count the day-seventy-five receipt as money available on day sixty.

This is why “the line revolves” is incomplete. It revolves under the agreement when principal is repaid and other conditions permit another draw. A late receipt can leave the first job occupying the capacity intended for the next.

Ask what happens if the need does not end

A facility ending on day ninety is not a permanent funding source. If stock stays unsold or customer balances keep growing, the repayment event may not happen as planned. A future renewal conversation is not a committed extension.

A longer term loan may spread a persistent need across a longer schedule, but a different maturity also changes the comparison. Obtain its complete payments and conditions. Do not quietly substitute an imagined longer loan for the actual offer when the short plan fails.

The whole-loan-cost guide examines payments, principal and final balances. Here the distinguishing question is whether borrowing access and repayment timing match repeated temporary gaps or a need that remains outstanding.

Read the conditions that can defeat the calendar

For an actual line, establish the current borrowing base, eligible receivables or inventory, reserves, reporting and draw conditions. A $10,000 headline limit may not permit a $10,000 draw. Check when transfers become usable funds and what a late payment changes.

For either arrangement, identify variable-rate terms, fees, final balances, collateral, guarantees, restrictions and required reporting work. Budget the paid administration necessary to keep the agreement current. None of that work is supplied merely by an approval email.

Ask for a documented payoff calculation before assuming early repayment saves a particular amount. In the fictional term comparison, the supplied schedule is followed because no different payoff arrangement was provided.

The working-capital guide helps locate the original gap. Funding should be added to that calendar, with the new debt and its repayment visible, rather than used to erase the question of how customers eventually pay for the operation.

Choose from a funded record

1. Describe the use. Name the payments, dates and actual route to repayment.
2. Compare executable offers. Put draw access, cash proceeds, complete charges and principal dates on the same operating plan.
3. Check the low point. Respect other obligations and the reserve you actually intend to preserve.
4. Stress the repayment event. Delay a meaningful receipt and check whether the next commitment remains possible.
5. Read the expiry and conditions. Do not make a renewal, redraw or payoff saving exist merely by needing it.