There are two main ways to fund your small business via a financial institution: a term loan (also called an installment loan), or a business line of credit. Either of these can be used for short-term or long-term financing. In this article, we’ll define loans and lines of credit, and outline the pros and cons of each.
What you need to know
- Term loans and business lines of credit are common ways to fund a small business.
- Term loans are installment loans with fixed repayment schedules, while lines of credit are revolving and let you draw in increments.
- Use a term loan for one-time projects and a line of credit for working capital and cash flow gaps.
- Both can help build business credit when you manage them responsibly and pay on time.
Term loans vs lines of credit: Summary
In short:
- A term loan is installment financing for a fixed need.
- A line of credit is revolving financing for flexible working capital.
| Feature | Term loan | Line of credit |
|---|---|---|
| Funding amount | Lump sum, often fixed at approval. Bluevine term loans go up to $500K through partners.BVSUP-00151 | Revolving credit limit you can draw from as needed. Bluevine offers lines of credit up to $250K.BVSUP-00020 |
| Repayment | Fixed weekly or monthly installments over a set term. | Repay what you draw, then available credit replenishes as you pay it down. |
| Rate type | Usually fixed. | Usually variable. |
| Funding speed | Often slower because the lender underwrites the full lump sum. | As fast as a few hours after approval. |
| Eligibility requirements | Typically around 600 to 680 personal credit score, with revenue and time in business varying by lender. | Bluevine requires 625+ FICO, 12+ months in business, $10,000 monthly revenue. |
Submit one application to see if you qualify for business credit lines and term loans.
What is a term loan?
Term loans are lump-sum loans repaid in fixed installments over a term. This type of business debt financing can be guaranteed by collateral (secured business loan) or not (unsecured term loan). The average repayment term is three-to-six years, repaid monthly.
Interest rates on term loans are typically fixed, so your monthly installment payments are all the same amount. The repayment terms in loan agreements state how much the payments will be and how long you need to make payments. The agreement should also include any fees you pay on the loan, including penalties for late payments.
Before you sign a loan agreement, your lender will give you an amortization schedule that breaks down how much of each monthly repayment goes to interest and how much goes to the principal. Some lenders charge a fee if you try to pay the loan off early, so check for this and other fees before signing. Note that the average loan length can vary and it’s important to understand when your loan is set to end.
What is a line of credit?
A business line of credit (LOC) provides your business with a pool of revolving credit. You can draw funds up to your approved limit, repay what you use, and draw again as the balance replenishes. Interest only accrues on the amount you actually use, which makes this tool more flexible than a term loan when expenses are uneven or hard to predict.
That flexibility is why lines of credit are often used for payroll timing, inventory restocking, seasonal gaps, and unexpected operating costs. A Bluevine Line of Credit requires 625+ personal FICO, 12+ months in business, $10,000 in monthly revenue, and an eligible business in good standing.
A line of credit usually has a draw period and a repayment period. During the draw period, you can take funds as needed up to your limit. As you repay, your available credit opens back up, which is what makes the product revolving. Once the draw period ends, you generally stop making new draws and focus on paying down the balance.
Most lines of credit charge interest only on the amount you draw, not on the full approved limit. Repayment can be interest-only during the draw period or include principal and interest depending on the lender and plan. That makes a working capital line of credit useful when you need flexibility more than a fixed payoff schedule.
Secured vs unsecured business line of credit
- A secured business line of credit requires collateral. That collateral might be inventory, receivables, equipment, or another business asset. Because the lender has more protection, secured lines can come with better pricing or higher limits, but you put business assets at risk if you default.
- An unsecured business line of credit does not require collateral upfront. The trade-off is that lenders take on more risk, so approval often depends more heavily on revenue, time in business, and credit profile. Unsecured lines can be a strong option when you want flexibility without pledging assets.
When to use a term loan
A term loan makes more sense when you know the size of the expense, you can map out the payoff, and you do not need to keep borrowing against the same credit limit. That makes it a good match for a large one-time investment, such as a location buildout, equipment purchase, refinance, or expansion project. If you have a specific business growth opportunity with a fixed budget, a term loan gives you a clean way to fund it and repay it on schedule.
Examples include capital loans for a new or growing business, equipment loans for computers or office buildouts, and real estate loans for property. Small Business Administration 7(a) loans can also fund working capital and other business uses, while 504 loans are designed for major fixed assets.
If your company lands a contract that requires a new workspace, equipment, or inventory all at once, a term loan can cover the upfront cost without forcing you to manage repeated draws. That is why term loans usually make more sense for planned projects with a one-time or short-term funding need.
When to use a line of credit
A line of credit makes more sense when your cash needs move around. If you are waiting on customer payments, buying inventory before demand arrives, or bridging payroll during a slow week, the ability to draw only what you need can save interest and reduce pressure on cash flow. A line of credit is also useful when you want a reserve you can tap without starting a new loan every time.
Think of it as a flexible working capital buffer. Seasonal businesses often use it to smooth out swings in revenue. Businesses with recurring but unpredictable costs use it to handle short gaps without overborrowing.
A common scenario for using a line of credit is to bridge payroll. If you bill clients on net-30 terms but need to pay your team this week, a line of credit can cover the gap without locking you into a fixed lump-sum loan you do not fully need. Another common scenario is seasonal inventory, where you draw, repay, and draw again as demand rises and falls.
Pros and cons: business term loan
Pros
- Predictable monthly payment: Fixed installments make budgeting easier because the payment amount usually does not change over the life of the loan.
- Larger upfront amount: Term loans are built for one lump sum, which works well for major purchases or projects.
- Often fixed rate: A fixed rate gives you repayment stability, which can help when you want certainty.
Cons
- Interest on the full amount from day one: You start repaying the entire borrowed sum immediately, even if you use it gradually.
- Prepayment penalties are possible: Some lenders charge extra if you pay off early, so you need to read the loan terms closely.
- Slower funding: Underwriting a lump sum usually takes longer than a revolving credit product.
Pros and cons: business line of credit
Pros
- Flexible draw: You can take only what you need, when you need it, which is useful for uneven cash flow.
- Lower borrowing cost when used briefly: Because interest only accrues on the amount you draw, short-term use can be cheaper than financing the full amount with a term loan.
- No commitment to the full amount: You do not have to use the entire approved limit just because it is available.
Cons
- Variable rate: If benchmark rates rise, your cost can rise too.
- Draw or maintenance fees can apply: Some lenders charge recurring or usage-based fees.
- Limits are often lower than large term loans: A line of credit is usually smaller than a big term loan or SBA loan.
Cost considerations: rates and fees
Term loans usually give you a fixed rate and a fixed payment schedule, which makes the cost easier to forecast. Lines of credit usually use a variable rate and charge interest only on what you draw, which can be cheaper for short-term use and more expensive if you carry balances for long periods. For example, a Bluevine Line of Credit includes no fees for opening, maintaining, prepaying, or closing the account, while its term loans are available through partners with one application and no credit-score impact until you accept an offer.
A simple example shows the difference. If you borrow $30,000 at 10 percent APR for a year, the interest is about $3,000. With a line of credit, the actual cost depends on how much you draw and how quickly you repay. With a term loan, you usually pay on the full principal from day one. Click here to learn more about avoiding hidden fees.
How do term loans or lines of credit impact my business credit score?
Business credit bureaus track how much debt your business takes on and how well you repay it. On-time payments can improve business credit over time, while late payments can hurt it. The big difference is that revolving credit and installment credit are scored differently. Revolving accounts, like business lines of credit, contribute to credit utilization, while installment loans do not work the same way because they are fixed-schedule debts.
That means a line of credit can affect your business credit more directly if you carry a high balance relative to your limit. Installment loans do not create the same utilization ratio, but they still matter because payment history remains important. If you use either product responsibly, you can strengthen your business credit profile and open the door to better financing later.
What are the business loan application process and requirements like?
Qualification is usually stricter for a term loan than for a smaller revolving line, but the exact bar depends on the lender. Most business loans require a personal credit score around 600 to 680, and many lenders also want at least one to two years in business, reliable revenue, and a reasonable ability to repay.
Side-by-side, eligibility requirements look like this:
- Term loan eligibility: typically broader on loan size, but often stricter on underwriting, especially at banks and SBA lenders.
- Line of credit eligibility: often faster to review, but still tied to cash flow, time in business, and credit score.
If you are comparing bank business loans to fintech options, the main difference is usually speed and flexibility. Online lenders often approve faster and ask for less paperwork, while banks and SBA lenders may offer lower long-term cost if you can clear a higher qualification bar.
Can you have both a term loan and a line of credit?
Yes, you can often use both if the lender approves both products. That is a strong setup when you want one tool for a large planned expense and another for ongoing working capital. For example, a term loan can fund equipment or expansion, while a line of credit can sit in reserve for payroll gaps, inventory, or short-term cash flow swings.
Bluevine makes this combination especially simple because one application can lead to a line of credit up to $250K or a term loan up to $500K through partners. That gives you a single starting point if you want both flexible and fixed financing options in the same ecosystem.
Click here for a comparison of more small business funding alternatives.
Apply for terms loans and lines of credit, with no impact to your credit score.BVSUP-00008
FAQs: Terms loans vs credit lines
A term loan gives you a lump sum that you repay in fixed installments. A line of credit gives you a reusable limit that you can draw from as needed, and you pay interest only on what you use.
Not always. A line of credit is better for recurring, unpredictable, or short-term needs. A loan is better for a larger one-time purchase or project with a fixed budget.
Use a term loan when you know the full cost up front and want predictable payments. It is a better fit for equipment, renovations, property, and other planned investments.
A line of credit is revolving, so utilization can matter more because you are using a portion of a limit. A term loan is installment credit, so it does not work the same way in utilization scoring, but on-time payments still matter.
Yes, if the lender approves both. Many businesses pair a term loan for a large purchase with a line of credit for ongoing working capital. Bluevine offers both from one application.
Most business loans need a personal credit score around 600 to 680, plus enough revenue and time in business to show repayment ability. A Bluevine Line of Credit requires 625+ FICO, 12+ months in business, and $10,000 monthly revenue.
A line of credit is often faster once approved. Bluevine can deposit line funds as soon as a few hours after approval, while its partner term loan process can provide a decision in as fast as 24 hours.
Usually yes, but not always. Fixed rates are common for term loans, while lines of credit are typically variable. The exact structure depends on the lender and the offer.
Sometimes on term loans, rarely on many lines of credit. Term loan agreements can include prepayment penalties, so it is worth checking before you sign.
