Business Loan vs. Line of Credit: Which Should You Choose?

The core difference

A business term loan gives you a fixed amount of money upfront, with a set repayment schedule (typically monthly or weekly) over a defined term. You pay interest on the full amount from day one.

A business line of credit gives you access to a credit limit you can draw from as needed. You only pay interest on what you actually draw — not the full limit. As you repay, the credit becomes available again.

When a term loan makes sense

Term loans work best for one-time, planned expenses with a clear ROI and predictable timeline:

• Equipment purchases
• Vehicle or fleet acquisition
• Business acquisitions or buyouts
• Build-outs, renovations, or expansions
• Debt consolidation
• Marketing campaigns with a known budget

When a line of credit makes sense

Lines of credit are designed for variable, ongoing, or unpredictable cash needs:

• Bridging gaps in accounts receivable
• Seasonal inventory purchases
• Payroll during slow weeks
• Emergency repairs or unexpected expenses
• Opportunistic purchases (a vendor offering a 20% discount on a bulk order)
• Working capital reserve

Cost comparison

Term loans typically have lower interest rates than lines of credit because the lender knows exactly how much you owe and how long they'll be exposed. Lines of credit carry slightly higher rates to compensate for the optionality you're paying for.

But here's the key: if you only draw a portion of your line of credit, your effective cost can be lower than a term loan for the same amount. Borrowing $100K via a term loan at 12% APR for 12 months costs about $6,600 in interest. Drawing $40K on a $100K line of credit at 15% APR costs about $3,300 — even at the higher rate.

Qualifying differences

Lines of credit are generally harder to qualify for than equivalent-sized term loans because the lender has to underwrite for the maximum possible exposure, not just what you initially draw.

Expect tighter requirements on revenue consistency, time in business, and credit profile for lines of credit. Direct lenders like Alvara Capital may offer both products, with similar minimum qualifications (6 months in business, $10K+/month revenue, no minimum credit score), but final approved amount may differ between the two.

Can you have both?

Yes. Many established businesses carry a term loan for a specific asset purchase and maintain a line of credit for working-capital fluctuations. The two products serve different functions and aren't redundant.

What you want to avoid is stacking multiple short-term products on top of each other (multiple revenue advances, for example) — that's a cash-flow trap, not a capital strategy.