Term financing vs. a business line of credit
Term financing usually gives you one set amount with a payment schedule. A line of credit gives you access up to a limit, under draw and renewal rules. Which fits better depends on what the money is for and how cash moves through your business.
How the two structures differ
Term financing generally starts with one payout. You repay it on an agreed schedule over a stated period. Depending on the agreement, payments may be fixed or variable, and collateral, a lien on the business or a personal guarantee may apply.
A line of credit sets an approved limit. You can request draws as long as the line is still available and you meet the conditions in the agreement. Some lines are revolving, so principal you repay becomes available again. Others are not. The provider may review the line at renewal or keep the right to stop further draws.
The FDIC describes term loans as having a fixed payment schedule, and lines as a way to borrow up to a limit. SBA programs show that both formats can serve business purposes: most 7(a) term loans use monthly principal-and-interest payments, while some SBA programs use monitored or revolving lines.
Term financing and a line of credit compared
| Feature | Term financing | Business line of credit |
|---|---|---|
| How you get the money | Usually one set amount after closing. | Access up to an approved limit, subject to draw conditions. |
| Reuse | A new request usually means another transaction or a renewal. | Possible with a revolving line, as you repay principal. |
| Payments | A scheduled series of payments over a stated term. | May depend on your draws, your outstanding balance and the provider's schedule. |
| Rate or charge | May be fixed, variable or expressed through another commercial financing measure. | May be variable, and may include draw, maintenance, inactivity or renewal fees. |
| Common use | Known equipment, renovation, expansion or other defined spending. | Recurring working-capital needs, cash-cycle gaps or uncertain timing. |
| Main uncertainty | Whether the project brings in enough cash to cover every scheduled payment. | Whether future draws stay available, and what renewal or variable-rate terms change. |
Match the term to the life of the expense
If the term is much shorter than the useful life of what you're paying for, payments can pile up before the project brings in enough cash. The reverse can be wasteful too. You may still be paying for inventory or a short-lived expense long after the related sales are done.
Start with a cash-flow forecast that uses cautious revenue timing. Compare the scheduled payment, not just the stated rate, with the cash you expect to keep after payroll, taxes, suppliers and existing obligations.
- For a fixed project, write down the full budget, the start date and the expected payback period.
- For a recurring need, estimate the highest draw you're likely to need and how quickly each cycle turns back into cash.
- For either one, test a slower-revenue scenario and a higher-expense scenario.
Compare cost using the same inputs
A quoted interest rate, factor rate, fee or payment amount doesn't give you a full comparison on its own. Put every offer in the same frame:
- The net amount that will actually reach your business.
- The total dollars you're expected to pay.
- The number, amount and dates of the payments.
- Fees held back before funding, and fees paid later.
- The prepayment policy, and whether paying early changes the total cost.
- Collateral, guarantees, liens and what happens on default.
For a line, work out the cost of the draw you actually expect to use, then list maintenance, draw and renewal fees separately. For term financing, check whether the payments pay down the principal over the term, and whether a final balloon payment is left at the end.
Our guide to factor rates, APR and total cost explains these inputs, and the cost calculator turns a factor-rate offer into dollars.
Questions for the provider
- Is the line revolving or non-revolving, and when does availability come back?
- Can the provider lower the limit or stop future draws?
- What events trigger a review, a renewal or a demand for full repayment?
- Is pricing fixed or variable? If it's variable, which index and margin apply?
- Which fees apply even when you don't use the line?
- For term financing, is there a balloon payment or an irregular final payment?
- Does paying early lower the cost, add a fee or leave the total the same?
- Which business and personal assets back the obligation?
Sources
This guide summarizes general structures from the government sources below. Exact terms come only from the written agreement with the provider.
General educational information, not financial, legal, tax or accounting advice. It does not describe guaranteed products or terms.
- Federal Deposit Insurance Corporation: Small-business term loans and lines of credit
- U.S. Small Business Administration: 7(a) term repayment and working-capital lines
- U.S. Small Business Administration: Types of 7(a) loans and CAPLines
- Federal Reserve Board: Small Business Lending Survey description
Related guides
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