A business line of credit and a business term loan are the two most common forms of small business financing in the US, and choosing the wrong one for your situation can cost thousands of dollars in unnecessary interest or limit your ability to access funds when you need them most. The fundamental difference is structure: a line of credit is revolving and flexible, giving you a pool of capital to draw from as needed. A term loan delivers a one-time lump sum with a fixed repayment schedule. This guide explains when each option is the right tool and includes current 2026 rate benchmarks to help you compare costs.
How Each Product Works
A business line of credit works like a business credit card. Your lender approves a maximum credit limit, say $75,000. You draw funds whenever you need them, pay interest only on the outstanding balance, and repay as you go. As you repay, that credit becomes available again. Traditional bank lines of credit require 680+ credit score, 2+ years in business, and $250,000+ annual revenue. Online and alternative lenders are more flexible, often requiring 550+ FICO, 6+ months in business, and $100,000+ annual revenue.
A business term loan provides a lump sum of capital upfront that you repay over a defined period in fixed monthly installments. Short-term loans typically run 3 to 24 months with daily or weekly payments. Long-term loans stretch over 2 to 10 years with monthly payments. Rates are generally lower than lines of credit because the structure is more predictable for lenders. The SBA 7(a) loan, the most common government-backed option, is structured as a term loan.
Side-by-Side Comparison
When a Line of Credit Is the Right Choice
A line of credit is the correct tool for managing cash flow variability, covering seasonal revenue gaps, bridging the period between when you incur expenses and when customer invoices are paid, or handling unexpected operational needs. According to the Federal Reserve's Small Business Credit Survey, lines of credit are the most commonly used financing product among US small businesses ahead of term loans, largely because of this flexibility.
If your business has predictable cyclical patterns, a line of credit lets you draw in slow months and repay from strong month revenues. A landscaping company drawing against a $50,000 credit line in November and repaying from spring revenues is a classic use case. Because you pay interest only on what you actually use, a credit line can be substantially cheaper than a term loan for variable, unpredictable needs.
When a Term Loan Is the Right Choice
A term loan is the right tool for a defined, one-time capital investment whose benefit will be realized over time. Purchasing equipment with a 10-year lifespan, renovating a retail location, funding a specific marketing campaign with measurable ROI, or acquiring inventory at favorable wholesale pricing all fit the term loan model. Because the loan amount, rate, and monthly payment are fixed from day one, budgeting is straightforward and you know exactly when the debt is retired.
Term loans also typically offer lower interest rates than lines of credit because the predictable repayment schedule reduces lender risk. The SBA 7(a) loan, structured as a term loan, offers rates at Prime plus 2.75 to 4.75 percent for the most qualified borrowers. With Prime at approximately 8.50 percent in early 2026, qualified SBA 7(a) borrowers are seeing effective rates of 11.25 to 13.25 percent for terms up to 25 years.
Cost Comparison: $50,000 Need Over 24 Months
If you only need to access $30,000 on average throughout the period, a line of credit is more expensive per dollar borrowed but cheaper overall because you are not paying interest on the full $50,000. If you will deploy the full $50,000 immediately and hold it all, the term loan is cheaper because of its lower rate.
Using Both Together
Many growing small businesses use a term loan and a line of credit simultaneously. The term loan finances a specific long-term investment like a facility upgrade or major equipment purchase, while the credit line handles day-to-day working capital. This combination is considered best practice by many business finance advisors because it matches debt duration to asset life while preserving revolving access to short-term liquidity.
Qualification Requirements in 2026
Frequently Asked Questions
Is a business line of credit better than a business loan? Neither is universally better. A line of credit is better for ongoing, variable needs. A term loan is better for defined, one-time investments.
Can I get a business line of credit with a 600 credit score? Some online lenders like Fundbox require at least 600 FICO with $100,000 in annual sales and 6 months in business.
What is the typical interest rate on a business line of credit in 2026? Rates vary widely from approximately 8 percent APR for bank lines with excellent credit to 60 percent or more for some online short-term revolving products. Most small business owners with moderate credit access lines in the 15 to 30 percent range from online lenders.
Do business lines of credit require collateral? Many unsecured business lines of credit from online lenders do not require physical collateral, but a personal guarantee is almost always required. Secured lines of credit use business assets such as accounts receivable or equipment as collateral.
