BusinessArticlesThe two most common small business financing products solve different problems. Matching the wrong one to your need costs money either way.
A term loan and a business line of credit both put borrowed money in your hands, but they're built for different situations, and using one where the other fits better usually costs you — either in interest paid on money you didn't need yet, or in flexibility you don't have when you need it.
When a term loan fits
Term loans work best for a specific, one-time expense with a clear return: buying equipment, renovating a space, or financing an expansion you've already planned. You get the full amount up front, pay a fixed schedule, and know exactly what it costs over the life of the loan. The tradeoff is that once it's disbursed, you're paying interest on the whole amount regardless of whether you're using all of it yet.
When a line of credit fits
A line of credit is built for recurring or unpredictable needs — smoothing out seasonal cash flow gaps, covering payroll during a slow stretch, or having a buffer for opportunities that come up without warning. You only pay interest on what you draw, and you can repay and redraw as needed, which makes it more expensive per dollar borrowed than a term loan but often cheaper overall if you don't end up using the full limit.
The practical test
If you can point to a specific expense with a defined cost and a clear payback period, a term loan is usually the better fit. If you're trying to solve for uncertainty — cash flow timing, unexpected costs, or opportunities you can't fully predict — a line of credit does that job better. Some businesses end up using both, for different purposes, rather than picking one over the other.