When you need capital to grow, two options rise to the top: a business line of credit and a business loan. Both can work. The right choice depends on how you plan to use the money, how fast you need it, and how steady your cash flow is. This guide breaks down the differences in plain English so you can pick the best fit for your growth plan.
Quick Definitions
Business line of credit
A revolving pool of money you can draw from when needed. You only pay interest on what you use. As you repay, the credit becomes available again.
Business term loan
A lump sum you receive upfront. You repay it over a set schedule with fixed payments until it is paid off.
When a Line of Credit Makes More Sense
Choose a line of credit if you need flexible, on-demand access to cash for short-term needs.
- Managing cash flow gaps. Cover slow receivables or seasonal dips.
- Buying inventory. Draw only what you need to restock.
- Small projects or emergencies. Quick taps without a new application.
- Ongoing marketing or ad testing. Scale spend, repay fast, draw again.
Pros
- Interest applies only to drawn funds
- Reusable after you repay
- Can pair with other funding sources
Cons
- Variable rates are common
- Lower limits than loans in many cases
- May include draw fees or inactivity fees
When a Business Loan Makes More Sense
Pick a term loan if you have a clear, one-time investment with a long payback period.
- Equipment or vehicles
- Build-outs or renovations
- Large inventory buys before a known sales event
- Hiring for a big contract with predictable revenue
Pros
- Larger amounts available
- Fixed payments help planning
- Often lower rates than lines for long terms
Cons
- Interest accrues on the full amount from day one
- Less flexible once funded
- Prepayment penalties may apply with some lenders
Side-by-Side Comparison
Cost and Fees to Watch
- Interest rate. APR for loans and lines. Lines often float.
- Origination or draw fees. Some lenders charge per draw or a setup fee.
- Maintenance or inactivity fees. Common on lines of credit.
- Prepayment penalties. More common on loans.
- Collateral. Some products require a lien on business assets.
Read the fee schedule. Run the math on your real use case, not a perfect scenario.
Approval Factors You Can Control
- Time in business. More months help, but newer LLCs can still qualify.
- Revenue and cash flow. Bank statements and deposits matter a lot.
- Credit profiles. Personal and business credit, if you have it.
- Debt coverage ratio. Lenders check if your cash flow can support payments.
- Documentation. Keep your EIN letter, Articles of Organization, bank statements, and a simple plan ready.
How to Choose: A Simple Decision Flow
- Will you spend in small, changing amounts over time
- Choose a line of credit.
- Is it one large purchase with a long payoff window
- Choose a term loan.
- Unsure or mixed needs
- Start with a line of credit for flexibility. Layer a term loan for a major project when the timing is right.
Real-World Examples
- Ecommerce brand. Uses a 100k line to buy inventory every month. Draws 40k to 60k, repays after sales clear. Interest only on amounts used.
- Agency. Wins a 12-month contract. Takes a 75k loan to hire two team members and upgrade equipment. Fixed payments match the contract timeline.
- Contractor. Keeps a 50k line for materials. Uses a separate 150k loan for a facility build-out.
Application Checklist
- Lock the basics. LLC formed, EIN, business bank account, matching address and phone across records.
- Prepare documents. Last 3 to 6 months of bank statements, P&L if available, and a one-page growth plan.
- Pick the product. Line for flexible needs. Loan for a single big purchase.
- Ask for the right amount. Do not over-ask. Match the limit to real use.
- Compare offers. Look at APR, fees, term, and covenants.
- Plan repayment. Tie payment dates to cash-in dates to avoid stress.
Common Mistakes to Avoid
- Using a loan for tiny recurring needs. You pay interest on cash you do not need yet.
- Using a line for multi-year projects. Rate risk and renewals can hurt you.
- Ignoring fees. Draw and maintenance fees add up if you rarely use the line.
- Mismatch in data. Make sure your legal name, address, and revenue match across documents.
- No runway for repayment. Align payment timing with your sales cycle.
Growth Strategy: Use Both the Smart Way
Many businesses use both over time.
- Keep a line of credit for inventory and cash flow gaps.
- Use a term loan for equipment or build-outs.
- As you scale, increase limits and refinance into better terms.
This layered approach gives you flexibility and stability at the same time.
Final Thoughts
If your needs are frequent and variable, a business line of credit is your best friend. If your need is big and strategic, a business loan is the right tool. Match the funding to the job, keep documents clean, and borrow only what your cash flow can handle. With the right structure, you protect margins, reduce stress, and create room to grow with confidence.
