Two of the most common funding options sound similar but behave very differently. A line of credit is a revolving pool you draw from as needed; a term loan is a single lump sum you repay on a fixed schedule. Choosing the right one comes down to one question: is your need ongoing or one-time?

Get this match right and your payments feel proportional to the value you’re creating. Get it wrong and you’ll either pay interest on money you aren’t using, or stretch a short-term tool over a long-term project.

How a line of credit works

A line of credit gives you a set limit — say $100,000 — that you can borrow against, repay, and borrow again. You only pay interest on what you’ve actually drawn. It’s built for recurring, unpredictable needs: covering payroll in a slow week, buying inventory ahead of a busy season, or bridging a gap while you wait on invoices.

  • Flexible: draw only what you need, when you need it
  • Interest only on the drawn balance
  • Replenishes as you repay — ongoing access

How a term loan works

A term loan delivers the full amount up front and is repaid in equal installments over a fixed term — often one to five years. Because the payment and payoff date are predictable, it’s ideal for one-time investments with a clear return: buying equipment, funding a renovation, or consolidating higher-cost debt.

Use a line of credit for rhythm, and a term loan for milestones. Most growing businesses eventually keep one of each.

A simple way to decide

Ask how long the need will last. If the money solves a recurring, short-lived gap, a line of credit keeps costs low and flexibility high. If it funds a single asset or project you’ll benefit from for years, a term loan spreads the cost to match.

Rule of thumb

Match the life of the financing to the life of the need. A five-year asset deserves a multi-year loan; a two-week cash gap does not.

Can you use both?

Absolutely — and many established businesses do. A term loan funds the big move while a line of credit handles the day-to-day ebb and flow. Layering the two keeps each tool doing the job it’s best at.

Key takeaways

  • A line of credit is revolving and flexible — best for recurring, short-term needs.
  • A term loan is a fixed lump sum — best for one-time investments with a clear return.
  • You only pay interest on what you draw from a line of credit.
  • Match the length of the financing to the length of the need.