When small business owners compare a business line of credit vs term loan, they’re usually trying to solve the same problem: how to access capital without creating new cash flow stress. Both options provide funding, but they work very differently—and choosing the wrong one can make everyday expenses harder to manage.
Here’s the short answer up front: A business line of credit is typically better for ongoing or unpredictable expenses, like payroll gaps, inventory restocking, or seasonal slowdowns. A term loan is usually better for large, one-time investments with a clear payoff timeline, such as equipment, renovations, or expansion.
These two financing options are often confused because they’re both referred to as “business loans.” But they affect timing, repayment, flexibility, and risk in very different ways.
According to a Bluevine cash flow management survey, nearly 4 in 10 small businesses report having less than one month of cash reserves, which makes these differences especially important.
This guide breaks down how each business financing option works, when one makes more sense than the other, and how to choose based on real-world cash flow—not theory.
What you need to know
- A business line of credit is a revolving credit line you can draw from when you need it, which you repay only for what you borrow.
- A term loan is a lump sum you repay in full over a set period of time.
- Lines of credit tend to be a better fit for ongoing, day-to-day cash flow needs, while term loans better serve one-time, long-term investments.
What is a business line of credit?
A business line of credit gives you revolving access to funds up to a set limit. You can draw money when you need it, repay what you use, and then borrow again as your available credit replenishes.
You typically only pay interest on the amount you actually draw, not the full credit limit. That makes lines of credit well suited for short-term or recurring needs where expenses don’t arrive all at once.
For many small businesses, a line of credit acts as a cash flow buffer. It’s there to smooth timing gaps—covering payroll while waiting on invoices, restocking inventory before a busy season, or handling unexpected expenses without draining cash reserves.
Because funds can be reused, a line of credit emphasizes flexibility over structure. That flexibility can be powerful, but it also requires discipline to avoid carrying balances longer than necessary.
What is a term loan?
A term loan provides a lump sum of capital upfront that you repay over a fixed period—often with predictable monthly payments.
This structure works well when you know exactly how much money you need and what it’s for. Equipment purchases, build-outs, renovations, or planned expansions often fit this model because the cost and timeline are clear.
With a term loan, the repayment schedule is set from the start. That predictability can make budgeting easier, but it also means less flexibility if cash flow tightens unexpectedly.
In contrast to lines of credit, term loans emphasize planning and commitment. You’re locking in both the funding and the repayment schedule, which can be helpful for long-term investments but restrictive for day-to-day operating needs.
Business line of credit vs term loan: Key differences at a glance
| Feature | Business line of credit | Term loan |
|---|---|---|
| Access to funds | As needed, up to a limit | Lump sum upfront |
| Repayment structure | Based on amount drawn | Fixed schedule |
| Flexibility | High | Lower |
| Best for | Ongoing expenses | One-time investments |
| Cash flow impact | Variable | Predictable |
Which option is better for cash flow?
Cash flow management is where the distinction becomes most practical.
A business line of credit can align with your needs as they fluctuate. You borrow during slow periods, repay during strong ones, and avoid paying for capital you’re not using. This makes it easier to manage variability—especially for seasonal businesses or companies with uneven payment cycles.
A term loan creates fixed obligations. Your payment stays the same whether revenue is strong or soft. That predictability can help with planning, but it can also strain cash flow if sales dip or expenses spike.
Given that nearly 40% of small businesses operate with less than one month of cash for operating expenses, flexibility often matters more than certainty. For businesses managing frequent inflows and outflows, that’s where a line of credit tends to shine.
When a business line of credit makes more sense
A line of credit is usually the better fit when expenses are recurring, short-term, or unpredictable.
Common examples where a business line of credit makes more sense include:
- Seasonal revenue swings that create temporary gaps
- Inventory restocking ahead of demand
- Payroll coverage while waiting on incoming customer payments
- Short-term operating expenses that don’t justify a long repayment horizon
In these situations, the ability to borrow, repay, and reuse funds matters more than locking in a single loan amount.
Bluevine Tip
Tired of waiting on customer payments? Manage all your accounts receivable from the same dashboard you manage your business checking account.
Bluevine gives you multiple ways to get paid effortlessly, including built-in invoicing tools, in-person Tap to Pay, and more.BVSUP-00192
When a term loan makes more sense
A term loan is often the better choice when you’re making a large, planned investment with long-term value.
Typical use cases for term loans include:
- Equipment purchases with a defined cost
- Business expansion, such as opening a new location
- Renovations or build-outs with a clear budget
- Long-term investments expected to generate returns over time
When the amount and purpose are known upfront, a structured repayment plan can make sense and reduce uncertainty.
Did you know?
Bluevine makes it easy to apply for multiple types of business financing, including the Bluevine Line of Credit and term loans via partners, with one simple application.BVSUP-00151
Not only will the application only take you a few minutes to submit—you can apply without impacting your credit score.BVSUP-00128
Can a small business use both a line of credit and a term loan?
Yes, many small businesses use both a line of credit and a term loan—each for different needs.
A common approach is to use a line of credit for day-to-day cash flow flexibility and seek out a term loan when you have a long-term project planned. The key is ensuring that all your line of credit and loan repayments are still manageable, and that those payments realistically align with your cash flow.
Using both financing options isn’t about stacking debt. It’s about matching the right tool to the right job.
Bluevine Tip
Having more than one loan at a time—sometimes called loan stacking—can be risky for your business. When you take on too much debt, you increase the possibility that you default on payments. You also want to be careful that you don’t violate your original loan agreement, which could automatically lead to a default.
How Bluevine helps businesses think about this decision
At Bluevine, our focus is to help you make a financing decision with your cash flow top of mind. Financing works best when it supports how money actually moves through your business.
For many businesses, that starts with flexibility. A business line of credit can help smooth timing gaps and reduce the stress of short-term cash flow swings. For larger, planned investments, structured options can make sense when paired thoughtfully.
Whether your ideal fit is a line of credit or a term loan, you’re able to access financing that works for your business today—without limiting tomorrow.
One more thing to consider: Building business credit
Another consideration is how you can use a line of credit or term loan to help build your business credit. The best way to do this is to make sure your lender reports your payment activity to one of the three major business credit bureaus: Dun & Bradstreet, Experian, or Equifax.
For example, Bluevine reports your line of credit payments to Experian, which means that consistent, on-time payments can help strengthen your business credit score.
See how Bluevine simplifies line of credit and term loan applications.
Frequently asked questions
Should I get a business line of credit or a term loan?
A line of credit is generally better for ongoing or unpredictable expenses, while a term loan works better for a one-time investment with a clear repayment timeline. The right choice depends on how often you need access to funds and how predictable your cash flow is.
How do I choose between a line of credit and a term loan?
Start by defining your business’s financial needs. Recurring or short-term needs usually favor a line of credit. Large, planned expenses typically justify a term loan.
When does a term loan make more sense than a line of credit?
A term loan makes more sense when funding a major purchase or expansion that delivers value over time, such as equipment or a new location.
Is a line of credit cheaper than a term loan?
Not always. Costs depend on how much you borrow and how long you carry a balance. Lines of credit can be cost-effective when used briefly.
Which option is better for short-term expenses?
A business line of credit is typically better for short-term expenses because of its revolving nature.
Which option is better for long-term investments?
A term loan is usually better for long-term investments due to its structured repayment schedule.
How do repayment terms differ between lines of credit and term loans?
Term loans follow a fixed repayment schedule. Lines of credit vary based on usage, though each draw usually comes with its own fixed repayment schedule.
Are term loans riskier than lines of credit?
Neither is inherently riskier. Risk depends on how well the repayment structure and schedule fits your cash flow.
Can I reuse funds from a business line of credit?
Yes. As you repay your line of credit balance, your available credit replenishes.
How do lenders evaluate lines of credit vs term loans?
Lenders look at revenue, cash flow, credit profile, and intended use of funds. The emphasis can differ depending on the product.
