A bakery owner gets approved for a $150,000 SBA term loan to cover "working capital." She takes the full amount, pays interest on all of it starting day one, and six months later most of the cash is still sitting untouched in her checking account — she only ever needed about $20,000 at a time to bridge slow weeks between catering contracts. She's paying interest on $150,000 to solve a $20,000 problem.
A landscaping contractor does the opposite mistake in reverse. He opens a $75,000 line of credit to buy a used dump truck, planning to pay it down "eventually." Two years later he's still carrying a $60,000 balance, the line's variable rate has crept up twice, and he has almost no available credit left for the emergency repairs and seasonal payroll gaps the line was actually designed for.
Both business owners got financing. Both got approved. Both picked the wrong product for the job — and it cost them real money. The decision between a business line of credit and a term loan isn't really about which one is "better." It's about matching the shape of the money to the shape of the need, and most owners never get a clear explanation of how to do that.
The Core Difference: Lump Sum vs. Revolving Access
A term loan gives you a single lump-sum disbursement upfront. You start repaying it immediately on a fixed schedule — typically monthly — and interest accrues on the full principal from day one, regardless of how quickly you actually put the money to work. Once you pay it off, the loan is closed; if you need money again, you apply again.
A business line of credit works more like a credit card with a business-sized limit. The lender approves you for a maximum draw amount — say $50,000 or $250,000 — and you only borrow (and only pay interest on) what you actually pull out. Pay down what you've drawn, and that capacity becomes available again without a new application. A $250,000 line sitting untouched for six months costs you nothing in interest; a $250,000 term loan sitting untouched costs you interest on the entire balance every single month.
That structural difference is the whole ballgame. Everything else — rates, terms, qualification — flows from it.
What Each One Actually Costs in 2026
Rates vary widely by lender type, your revenue, time in business, and credit profile, but current ranges give a useful picture:
Term loans:
- Bank term loans: roughly 6.8%–11% APR
- SBA 7(a) loans: roughly 9.75%–13.25% APR (the closest thing to a "gold standard" for affordability, though approval can take several weeks)
- Online/alternative lenders: rates climb quickly, sometimes into the 20%–45% range for weaker credit profiles
Lines of credit:
- Bank lines: roughly 8%–14% APR
- SBA CAPLine (a lesser-known SBA program built specifically for working-capital lines): roughly 9%–11.5% APR
- Online lenders: 12%–22% APR, with weaker-credit borrowers seeing considerably more
Qualification bars differ too. Term loans, especially bank and SBA products, typically want a credit score of 670+ and often close to $200,000 in annual revenue. Lines of credit — particularly from online lenders — can be more forgiving, with some approving scores as low as 600. According to the Federal Reserve's most recent Small Business Credit Survey, 40% of small businesses that sought financing applied for a line of credit versus 33% for a term loan, and lines were approved slightly more often (73% vs. 65%).
When a Term Loan Is the Right Tool
Term loans make sense when you have a specific, one-time, sizable expense with a defined payoff horizon:
- Buying a piece of equipment, a vehicle, or real estate that will generate value for years
- Financing a buildout, renovation, or major expansion
- Consolidating higher-cost debt into one predictable payment
- Any purchase over roughly $50,000–$100,000 where you want a fixed rate and a known end date
The fixed schedule is a feature here, not a limitation — you know exactly what you owe and when you're done owing it, which makes it easy to model against the asset's expected return.
The mistake to avoid: using a term loan to plug a recurring or unpredictable cash-flow gap. If you're borrowing to cover payroll during a slow season, or to bridge the 45 days between shipping a customer's order and actually getting paid, a term loan forces you to pay interest on money you might not need for months at a stretch — and then you're stuck reapplying from scratch the next time the same gap opens up.
When a Line of Credit Is the Right Tool
A line of credit earns its keep when the need is ongoing, variable, or unpredictable in timing:
- Smoothing out seasonal revenue swings (a landscaper's winter lull, a retailer's post-holiday slump)
- Bridging accounts-receivable timing gaps — you've invoiced but haven't been paid
- Building inventory ahead of a busy season without knowing the exact dollar amount you'll need
- Covering unplanned repairs, opportunities, or short-notice expenses
The advantage compounds: because you only pay interest on what's drawn, a line of credit rewards you for borrowing conservatively and paying down balances quickly. It's a standing safety net, not a one-time infusion.
The mistake to avoid — and the more common one — is using a line of credit as a substitute term loan: drawing the full limit for a single large purchase and slowly paying it down over years. That defeats the purpose on two fronts. First, you lose the interest-only-on-what-you-use advantage the moment you draw it all at once. Second, you tie up your entire safety net, so when the actual emergency or seasonal gap shows up, there's no available credit left to cover it.
A Simple Decision Framework
Ask yourself three questions before applying for either product:
- Is this a one-time expense or a recurring pattern? One-time → term loan. Recurring or unpredictable → line of credit.
- Do I know the exact amount I need, or just a ceiling? Exact amount → term loan. Rough ceiling, actual need varies → line of credit.
- Will the money be working immediately, or sitting idle between uses? Working immediately → term loan is efficient. Sitting idle between draws → a line of credit avoids paying for capital you're not using.
If you answer "recurring," "ceiling," or "idle between uses" to any of these, a line of credit will almost always be the cheaper and more flexible choice — even at a slightly higher headline rate — because you're not paying interest on money you're not using. If you answer "one-time," "exact amount," and "immediate," a term loan usually wins on rate and gives you a cleaner payoff date.
It's also worth remembering what financing can't fix. A loan or line can solve a timing problem — cash coming in later than expenses go out. It generally can't solve a margin problem — a business that loses money on every job it takes will lose money faster with borrowed capital, not slower. Before taking on either product, make sure the underlying issue is really about timing.
Why Your Bookkeeping Needs to Keep Up
Whichever product you choose, the accounting treatment differs in a way that trips up a lot of business owners. A term loan disbursement is a liability the day it hits your account — the full amount, recorded up front, with each payment split between principal and interest. A line of credit is different: nothing shows up on your balance sheet until you actually draw against it, and the balance moves up and down as you draw and repay. If your books don't track that draw-by-draw activity separately from your operating cash, it becomes very easy to lose track of exactly how much available credit you have left — which is precisely the situation that turned the landscaper's emergency line of credit into a fully drawn, slow-moving term loan in disguise.
This is where plain-text, version-controlled bookkeeping earns its keep. When every draw, repayment, and interest charge is a discrete, auditable entry rather than a number buried in a bank statement PDF, you can see at a glance exactly how much of your line is available and exactly what your term loan payoff date looks like — no end-of-month reconciliation required to answer either question.
Match the Money to the Need
The line of credit versus term loan decision isn't about finding the "best" financing product in the abstract — it's about matching the shape of the borrowing to the shape of the need. One-time, sizable, predictable expense: term loan. Ongoing, variable, hard-to-predict cash need: line of credit. Get that match right, and you'll pay less in interest and have the right capital available at the right moment. Get it backwards, and you'll end up like the bakery owner paying interest on idle cash, or the contractor with no safety net left when he actually needs one.
Keep Your Finances Organized from Day One
Whether you're managing a term loan payoff schedule or tracking draws against a revolving line, clear financial records make the difference between confidently choosing the right product and guessing. Beancount.io provides plain-text accounting that gives you complete transparency and control over your financial data — no black boxes, no vendor lock-in. Get started for free and see why developers and finance professionals are switching to plain-text accounting.