Two of the most common business funding products are often confused — the business line of credit and the term loan. They serve different purposes, have different cost structures, and suit different types of businesses and cash flow situations. Understanding the difference helps you choose the right tool for your specific need.
The Core Difference
A term loan gives you a lump sum upfront that you repay over a fixed period with regular payments. A line of credit gives you access to a credit limit you can draw from, repay, and draw again — similar to a credit card but for business purposes.
| Feature | Term Loan | Line of Credit |
|---|---|---|
| How funds are received | Lump sum at closing | Draw as needed up to limit |
| Repayment structure | Fixed daily/weekly/monthly payments | Pay only on what you draw |
| Best for | Specific one-time purchases | Ongoing or recurring needs |
| Interest/cost | On full amount from day one | Only on outstanding balance |
| Revolving | No — repay and done | Yes — repay and reuse |
| Typical terms | 3 months to 10 years | 6 months to 3 years (revolving) |
When a Term Loan Makes More Sense
A term loan is the right choice when you have a specific, defined capital need:
- Purchasing equipment, machinery, or vehicles
- Funding a renovation or buildout with a known cost
- Buying inventory for a specific season or contract
- Hiring and onboarding a new team for a growth push
- Refinancing existing higher-cost debt
Term loans are also better when you want budget predictability — the fixed payment schedule makes cash flow planning straightforward. See FundCapa's term loan options →
When a Line of Credit Makes More Sense
A line of credit is ideal for ongoing, variable, or unpredictable capital needs:
- Managing seasonal cash flow gaps
- Covering payroll during slow periods
- Taking advantage of unexpected inventory deals
- Bridging gaps between invoicing and customer payment
- Handling emergency expenses without reapplying each time
The key advantage: you only pay for what you use. If you draw $20,000 from a $100,000 line, you're paying fees or interest on $20,000 — not the full line. See FundCapa's line of credit options →
Cost Comparison: What You Actually Pay
Example scenario: Your business needs up to $50,000 over the next year for variable expenses but won't use it all at once.
With a $50,000 term loan at 1.25 factor rate: you owe $62,500 total from day one, paying on $50,000 regardless of how you use it.
With a $50,000 line of credit: if you only draw $15,000 over the year, your cost is calculated on $15,000 only — potentially a fraction of the term loan cost.
Can You Have Both?
Yes — and many businesses do. A common strategy is to use a term loan for a specific capital investment (equipment, renovation) and maintain a line of credit for ongoing working capital needs. This separates the cost of specific assets from operational cash flow management.
Alternative Lenders vs. Banks for Each Product
| Bank | Alternative Lender (FundCapa) | |
|---|---|---|
| Min credit score (line) | 680+ | 550+ |
| Min credit score (term) | 660+ | 500+ |
| Time to fund | 2–6 weeks | 1–3 days |
| Collateral (line) | Often required | Usually not required |
| Documentation | Extensive | Bank statements only |
| Rates | Lower | Higher |
Which Should You Apply for First?
If you know exactly what you need the money for and the amount is fixed: term loan.
If you need flexibility, plan to use capital in installments, or want a safety net for variable expenses: line of credit.
If you're unsure: apply through FundCapa and we'll help you determine which product fits your situation based on your revenue, use case, and credit profile.
Not Sure Which Product Fits? Let Us Help.
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