Both put capital in your hands. Both are repaid with interest. But a line of credit and a term loan solve two different problems, and picking the wrong one is one of the quietest, most common ways businesses overpay for money.
Here's the decision framework, with automotive-business examples throughout.
The core difference in one minute
A term loan is a lump sum with a fixed schedule: $150K today, fixed payments for 48 months, done. You pay interest on the whole amount from day one, whether you've deployed it or not.
A line of credit is standby capital: a $100K limit you draw against when needed - $20K this month, repay it, $35K at auction season. You pay interest only on the outstanding balance. The line itself can sit unused and cost you little or nothing.
Side by side
| Term loan | Line of credit | |
|---|---|---|
| You receive | Lump sum once | Revolving limit, draw as needed |
| Interest on | Full amount | Only what's drawn |
| Rates (typical) | 9-20% APR | 10-22% APR (variable) |
| Payment | Fixed monthly | Varies with balance |
| Best for | Defined projects & purchases | Gaps, timing, opportunities |
| Discipline risk | Over-borrowing up front | Treating the limit as income |
Which one, when: quick scenarios
- Buying a spray booth or lift → term loan (or equipment financing - the asset secures a better rate)
- Auction runs where speed wins deals → line of credit, drawn and repaid per cycle
- Opening a second location → term loan sized to the buildout budget
- Payroll timing vs. slow insurance reimbursements → line of credit
- Consolidating expensive short-term debt → term loan with a lower blended rate
The structure most growing shops end up with
A modest line of credit as the permanent shock absorber, plus term loans (or equipment financing) taken per-project. The line handles surprises; term debt funds growth at the lowest matched cost. What you avoid: funding long-term assets on the revolving line at higher variable rates.
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FAQ
Is it harder to qualify for a line of credit than a term loan?+
Generally yes, slightly - a line is open-ended risk for the lender, so credit and revenue standards run a bit higher. If you're borderline, a term loan or equipment-secured deal is often the approvable path today, with the line added after 6-12 months of history.
Does an unused line of credit cost anything?+
Sometimes - watch for annual fees, maintenance fees, or non-usage fees. Many programs waive them. An unused line with no fees is free insurance; know your terms.
Can I have both at the same time?+
Yes, and it's common. Lenders coordinate around existing UCC positions. Structured well (line for timing, term for projects), the combination usually lowers your total cost of capital.
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