Business Line of Credit vs. Term Loan: Which Is Better?

When seeking business financing, two common options are a business line of credit and a term loan. Both provide capital for your Dallas business, but they work very differently. Understanding these differences helps you choose the right tool for your specific needs.

The Core Difference

Term Loan: You borrow a specific amount, receive it all at once, and repay it in fixed installments over a set period.

Line of Credit: You get access to a pool of funds you can draw from as needed, repay, and use again.

Think of a term loan as buying capital, while a line of credit is renting access to capital when you need it.

Head-to-Head Comparison

Factor	Line of Credit	Term Loan
Structure	Revolving (like a credit card)	One-time lump sum funding
Typical APR (2025/26)	8% - 35%+ (Variable)	7% - 13% (Bank) / 15%+ (Online)
Funding Speed	1 - 2 weeks (Bank) / 24 hrs (Online)	2 - 8 weeks (Bank) / 2 - 5 days (Online)
Approval Difficulty	Harder (approx. 46% approval rate)	Easier for assets (73% for equipment)
Interest Charged	On amount used only	On full loan amount
Best For	Variable/ongoing working capital	Specific, large investments

When to Choose a Line of Credit

A line of credit makes sense when:

Your needs are ongoing or unpredictable

You don’t know exactly when you’ll need capital or how much.

Example: A Dallas construction firm faces fluctuating material costs. We often see them use a line of credit to cover a sudden 20% price hike in lumber without delaying the project, then repay it once the client invoice clears.

You want to pay only for what you use

Why pay interest on $100,000 if you only need $30,000?

Example: You secure a $50,000 limit as a safety net. If you don’t touch it, you pay zero interest (though watch out for small annual maintenance fees). This efficiency is why recent Federal Reserve data shows 43% of businesses apply for lines of credit specifically for operating flexibility.

Cash flow timing is the issue

You know money is coming but need to cover expenses until it arrives.

Example: A manufacturer waits 60 days for customer payments but pays suppliers in 30 days. A line of credit bridges this timing gap perfectly.

Flexibility matters more than total cost

You value having capital available over minimizing interest costs.

Example: Seasonal businesses use credit lines during slow periods. They draw funds to cover payroll in the off-season and pay it down aggressively during their busy months.

When to Choose a Term Loan

A term loan makes sense when:

You have a specific, one-time need

You know exactly what you need the money for and how much.

Example: You are purchasing a $200,000 piece of machinery. You need the full amount upfront to pay the vendor.

You want high approval odds for assets

Lenders prefer funding tangible assets they can secure.

Example: Recent industry data indicates a 73% approval rate for equipment and auto loans, compared to just 46% for lines of credit. If you are buying a truck or an oven, a term loan is statistically easier to get.

Predictable payments help your planning

Fixed monthly payments make budgeting easier.

Example: A restaurant adding a second location wants to know exactly what their monthly payment will be for the next 5 years. This stability allows for precise cash flow forecasting.

The investment is long-term

Term loans match long-term investments with long-term financing.

Example: Buying commercial real estate benefits from a 15-25 year loan term. Using a short-term line of credit for a 20-year asset would destroy your monthly cash flow.

You want to lock in terms

Once you have a term loan, the rate and payment are set (for fixed-rate loans).

Example: With interest rates fluctuating, locking in a 9% fixed rate today protects you from future market hikes.

Cost Comparison

Line of Credit Costs

Interest: Charged only on the outstanding balance.
Draw Fees: Many lenders charge 1% to 3% every time you withdraw funds.
Maintenance Fees: Expect annual fees ranging from $150 to $500 just to keep the line open.
Rate Risk: Most lines have variable rates that rise with the Prime Rate.

Example: You have a $100,000 line but only use $50,000. At 12% interest, you pay roughly $6,000 in interest plus a potential $500 draw fee.

Term Loan Costs

Interest: Charged on the full loan amount from day one.
Origination Fee: An upfront charge of 1% to 5% of the total loan amount.
Prepayment Penalty: Some lenders charge a fee if you pay the loan off early.
Clarity: Total cost is easy to calculate before you sign.

Example: A $100,000 term loan at 10% for 3 years costs about $16,000 in total interest. You also pay a $3,000 (3%) origination fee upfront.

Combination Strategies

Many businesses use both:

Strategy 1: Term Loan + Credit Line

Use a term loan for your main investment and a credit line for working capital.

Example: We helped a client secure a $300,000 term loan for a new facility and a separate $75,000 credit line to handle the moving costs and minor renovations.

Strategy 2: Start with Credit Line, Convert to Term

Use a credit line initially, then convert sustained borrowing to a term loan.

Example: You draw $50,000 for a project that unexpectedly drags on. Instead of paying high variable rates indefinitely, you refinance that balance into a term loan with lower, fixed payments.

Strategy 3: Credit Line as Emergency Backup

Get a term loan for known needs, maintain a credit line for unexpected situations.

Example: Take a $150,000 term loan for your planned expansion. Keep a $50,000 credit line dormant as “insurance” against equipment failure or supply chain delays.

Questions to Help You Decide

Ask yourself:

1. Do I know exactly how much I need?

Yes → Lean toward term loan
No → Lean toward credit line

2. Is this a one-time need or ongoing?

One-time (Asset/Project) → Term loan
Ongoing (Payroll/Inventory) → Credit line

3. Do I want predictable payments?

Yes → Term loan
Flexible is OK → Either

4. Will I use all the funds immediately?

Yes → Term loan
Probably not → Credit line

5. What is the approval likelihood?

I have collateral/assets → Term loan (Higher approval odds)
I need unsecured cash → Credit line (Strict credit requirements)

Making the Right Choice

Neither option is universally better. The right choice depends on your situation.

Choose a line of credit when you need flexible access to capital for variable or ongoing needs.

Choose a term loan when you have a specific investment with a clear funding requirement.

Consider both when you have multiple financing needs with different characteristics.

Need help deciding which option fits your Dallas business? Contact us for a free consultation to discuss your specific needs.