Both are common ways to borrow, but they solve different problems — using the wrong one for your situation means paying for flexibility you don’t need, or not having flexibility you do.

Term loan

A lump sum, repaid on a fixed schedule with a fixed (or sometimes variable) rate. Best suited to a specific, one-time investment — equipment, a buildout, an acquisition — where you know the exact amount needed upfront.

Line of credit

A revolving credit limit you draw from as needed, repaying and redrawing over time, similar to a business credit card but usually with better rates. Best suited to managing cash flow gaps — covering payroll during a slow month, bridging the wait between invoicing and getting paid — rather than funding a single large purchase.

The cost difference to know

You typically pay interest on a term loan’s full amount from day one, while a line of credit only accrues interest on what you’ve actually drawn. That makes a line of credit cheaper for occasional, unpredictable needs, and a term loan more predictable for a known, planned expense.

A common approach: use both

Many established small businesses keep a term loan for planned capital investments and a line of credit as a standing safety net for cash flow timing — they’re not mutually exclusive, and using the right tool for each situation avoids overpaying on either.