Term loan or line of credit?
A term loan and a line of credit can cover the same need and cost very different amounts. Put them side by side, fees included. The payoff time is usually the surprise.
Compare them on the same borrowed amount: the loan's total interest plus origination and closing costs, against the line's interest over however long your repayment pace actually takes, plus the annual fee for each year it stays open.
The math
How this works
What is the difference between a term loan and a line of credit?
A term loan hands you the whole amount once and sets a fixed payment until the balance is gone, so you know the end date on day one. A line of credit is a limit you can draw against, repay and draw again, and you pay interest only on what you have taken. The trade is discipline for flexibility: a loan forces the balance down on a schedule, while a line's minimum payment can be small enough that the balance barely moves. For a one-time purchase with a known cost the loan is usually the cleaner fit, and for timing gaps that come and go the line is.
When should a small business use a line of credit?
Lines work best on short, repeating gaps: covering payroll while a large invoice is in transit, buying materials for a job that pays on completion, or getting through a slow season you can see coming. The money is there when you need it and costs nothing when you do not draw it, beyond any annual fee. Where lines go wrong is funding something long-lived, such as equipment, a buildout or a new hire, because the balance never clears and the interest keeps running. If your line has not been at zero in a year, it is functioning as a loan and probably should be one.
Why does a line of credit often cost more in the end?
Two reasons. Line rates are usually higher than term loan rates and are often variable, so the cost can move with the market. More importantly, the required payment is often interest only or a small percentage of the balance, which stretches repayment over years and charges interest for all of them. The comparison above shows that effect directly: choose a minimum-payment plan and watch the payoff time and total interest climb against the same amount on a fixed loan.
Questions people ask
Can I have both a term loan and a line of credit?
Many businesses do, and the two serve different jobs: the loan funds a specific purchase, the line covers timing. Lenders look at everything you already owe when they size a new facility, so having one affects how much of the other you can get. It is worth discussing both with your bank or credit union at the same time rather than one after the other.
What does interest only mean on a line of credit?
It means the required payment covers only the interest charged that month, so the balance you owe stays exactly where it was. That keeps the payment low, which helps in a tight month, but nothing gets paid off until you send more than the minimum. Set your own repayment pace rather than letting the minimum set it for you.
Do I pay anything on a line of credit I do not use?
Often there is an annual or maintenance fee to keep it open, and some lenders also charge a fee on the unused portion. Interest applies only to what you have drawn. Ask for the full fee schedule before you sign, and enter the annual fee above so it shows up in the comparison.
What does a variable rate mean for my payment?
A variable rate moves with an index such as the prime rate, so your interest cost can rise or fall while the balance is outstanding. On a percentage-of-balance payment, a rate increase sends more of each payment to interest and the balance comes down more slowly. Ask whether the rate is fixed or variable, what index it follows, and whether there is a cap.
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This is an estimate to help you think, not financial, tax or legal advice. Finli is not a bank and does not lend. Your own numbers, and your banker, beat any calculator.