New founders juggle cash flow like circus plates. One wrong business loan choice shatters momentum. Lines of credit and term loans dominate business loans, yet each serves distinct goals. This guide compares structure, costs, flexibility, and risks with hard numbers and real cases. Pick the right tool and scale without regret.
Core Mechanics: How Each Loan Works
Line of Credit Acts Like a Business Credit Card
Lenders approve a revolving limit—say $100,000. You draw $20,000 today, repay $5,000 next month, and redraw again. Interest hits only on the outstanding balance. Banks renew annually; online platforms auto-renew with good behavior.
Term Loan Delivers a Lump Sum Upfront
You receive $100,000 day one and repay in fixed monthly chunks over 1–10 years. Principal and interest stay predictable. Once repaid, the loan closes unless you refinance.
Key stat: SBA reports 62% of small business loans under $250,000 are term loans; lines of credit claim 28%.
Cost Breakdown: Interest, Fees, and True APR
Line of Credit Pricing
- Interest: 7–25% APR on drawn funds only.
- Fees: 0.5–2% draw fee + $0–$250 annual fee.
- Example: Draw $30,000 of $100,000 limit at 12% APR for 6 months → $1,800 interest. Repay early, pay less.
Term Loan Pricing
- Interest: 5–15% fixed or variable.
- Fees: 1–5% origination + possible prepayment penalty (2–4% year one).
- Example: $100,000 at 8% over 5 years → $21,200 total interest, locked regardless of early payoff.
Verdict: Lines win for short-term or uncertain needs. Term loans beat long-term fixed costs if rates lock under 7%.
Flexibility: When You Need Cash and How You Use It
Line of Credit Shines in Uncertainty
- Draw anytime during approval period.
- Repay and reuse instantly.
- Ideal for: Seasonal inventory, payroll gaps, emergency repairs.
Case: A boutique owner drew $15,000 in October for holiday stock, repaid by January, and redrew $8,000 in March for spring buys—all on one approval.
Term Loan Demands Precision
- One-time disbursement.
- Fixed schedule—no redraws.
- Best for: Equipment, real estate, acquisitions.
Case: A food truck operator borrowed $85,000 term loan for a custom rig. Monthly $1,800 payments matched projected catering revenue.
Rule of thumb: Forecast needs within 10% accuracy? Choose term. Expect swings? Secure a line.
Approval Hurdles for New Businesses
Line of Credit Requirements
| Lender | Min Time in Biz | Min Revenue | Min FICO |
|---|---|---|---|
| Chase | 2 years | $200K | 680 |
| Bluevine | 6 months | $120K | 600 |
| Brex | 0 months | $50K bank balance | N/A |
Term Loan Requirements
| Lender | Min Time in Biz | Min Revenue | Min FICO |
|---|---|---|---|
| Wells Fargo | 2 years | $250K | 700 |
| SBA 7(a) | 2 years (exceptions) | $100K | 650 |
| Funding Circle | 1 year | $150K | 660 |
Startup edge: Lines from fintechs approve in 24 hours with bank feeds. Term loans drag 4–8 weeks and demand tax returns plus projections.
Risk Exposure: What You Lose if Cash Dries Up
Line of Credit Risks
- Variable rates spike with prime (up 2–3% in Fed hikes).
- Renewal denial freezes access mid-year.
- Personal guarantee standard under $250,000.
Mitigation: Lock 50% of limit into fixed-rate draws (offered by Kabbage, OnDeck).
Term Loan Risks
- Fixed payments crush during slow months.
- Prepayment penalties trap you in high rates.
- Collateral foreclosure on equipment or invoices.
Mitigation: Negotiate no-prepay clauses; offer only specific assets.
Data point: Fed surveys show 18% of term loan borrowers face payment stress vs. 9% on lines during downturns.
Tax and Accounting Impact
Both Deduct Interest
IRS allows full deduction on Schedule C for business loans used for operations. A $10,000 interest bill saves $2,200 at 22% tax rate.
Line of Credit Accounting
Expense interest monthly as drawn. Capitalize nothing unless buying assets.
Term Loan Accounting
Amortize over life. Capitalize equipment purchases; depreciate over 5–7 years (Section 179 accelerates).
CFO tip: Match loan type to expense timing. Inventory (line) stays expensed; machinery (term) depreciates.
Decision Matrix for New Businesses
| Scenario | Best Fit | Why |
|---|---|---|
| $50K for holiday inventory, repay in 90 days | Line of Credit | Pay interest 1/4 year only |
| $120K for commercial kitchen buildout | Term Loan | Lock 10-year rate under 7% |
| $30K buffer for client delays | Line | Draw $5K–$10K as needed |
| $200K franchise fee + reno | Term | Predictable budget |
Hybrid Strategy: Stack Both Loans
Savvy founders layer tools.
- Secure $50,000 line for working capital.
- Layer $150,000 term loan for fixed assets.
- Cross-collateralize to cut rates 1–2%.
Result: Flexibility + predictability. Total cost stays under 9% blended APR.
Application Playbook
For Lines of Credit
- Connect bank accounts via Plaid.
- Upload 3 months statements.
- Approve in 1–3 days (Bluevine, Fundbox).
For Term Loans
- Submit 2 years tax returns.
- Provide P&L, balance sheet, debt schedule.
- Wait 2–6 weeks (banks) or 5–10 days (online).
Pro move: Pre-qualify both simultaneously. Soft pulls reveal offers without dings.
Real Founder Outcomes
- E-commerce store: $75,000 line → survived Prime Day stockout → $1.8M revenue year two.
- Coffee roaster: $110,000 term loan → bought roaster → cut COGS 35% → paid off in 4 years.
- Digital agency: $40,000 line + $60,000 term → hired team + bought software → 3x’d clients in 18 months.
Final Verdict
Choose line of credit if cash flow fluctuates, you repay fast, or revenue stays under $500K. Pick term loan for big-ticket assets, predictable payments, or locking low rates long-term.
Print this checklist:
- [ ] Forecast cash needs 6 months out
- [ ] Calculate interest at 50% draw (line) vs. full amount (term)
- [ ] Pre-qualify one of each
- [ ] Match use of funds to loan type
- [ ] Secure both if scaling fast
Business loans fuel growth when structure aligns with strategy. Choose wrong, and capital costs double. Choose right, and your new business thrives on day one.