When your business needs funding, it’s essential to choose the right financing structure. Two of the most common options—term loans and revolving credit—serve different purposes and come with distinct advantages and limitations.
In this comprehensive guide, we’ll break down how each option works, when to use them, and how to decide which is best for your business needs.
A term loan is a traditional form of financing where a business borrows a lump sum upfront and repays it over a fixed period, usually with interest. These loans can be short-term (under a year), medium-term (1–5 years), or long-term (over 5 years).
Fixed or variable interest rates
Monthly or quarterly repayment schedules
Often requires collateral or a strong credit profile
Suitable for large, one-time expenses
Purchasing equipment or real estate
Funding a business expansion
Consolidating existing debt
Predictable payments help with budgeting
Lower interest rates (especially for secured loans)
Larger loan amounts available
Less flexibility than credit lines
Harder to qualify for with bad credit
Prepayment penalties may apply
Revolving credit allows a business to borrow up to a pre-approved credit limit, repay, and borrow again. The most common example is a business line of credit.
Unlike term loans, revolving credit gives you flexible access to capital when needed—perfect for managing fluctuating expenses.
Reusable credit line with no fixed term
Interest accrues only on the amount used
Often unsecured but can be secured for larger limits
Managing cash flow
Covering short-term expenses
Handling seasonal revenue fluctuations
Flexibility to use funds as needed
No interest on unused funds
Reusable without reapplying
Higher interest rates
Lower credit limits
Risk of overspending if not managed carefully
| Feature | Term Loan | Revolving Credit |
|---|---|---|
| Structure | Lump sum repaid over time | Credit line reused as needed |
| Interest | Fixed or variable on full amount | Only on amount used |
| Repayment | Set schedule | Flexible, based on usage |
| Best For | Long-term investments | Short-term or fluctuating needs |
| Credit Limits | Typically higher | Typically lower |
| Qualification | Requires solid financials | Easier to obtain for smaller lines |
A term loan is ideal if your business:
Is making a large investment like buying property or equipment
Has predictable revenue to support regular repayments
Needs to consolidate existing debt
Can qualify for favorable terms based on strong credit
Example:
A manufacturing company takes out a $250,000 term loan to purchase a new piece of machinery, repaid over 7 years at a fixed rate.
Choose revolving credit if your business:
Needs ongoing access to capital
Experiences seasonal cash flow fluctuations
Wants flexibility for unexpected expenses
Doesn’t want to pay interest on unused funds
Example:
A retail business opens a $50,000 line of credit to prepare for increased inventory needs during the holiday season and repays the balance in the following quarter.
Ask yourself these questions:
Do you need a one-time lump sum or flexible access over time?
Lump sum = term loan
Ongoing access = revolving credit
Can your business handle fixed monthly payments?
Yes = term loan
Unpredictable revenue = revolving credit
Is this expense long-term or short-term?
Long-term investment = term loan
Operating expenses = revolving credit
Do you want to minimize interest costs?
Term loan may offer lower rates overall
Revolving credit only charges for what you use
If neither option feels right, you might explore:
Business credit cards – great for small purchases
Invoice financing – get advances on unpaid invoices
Merchant cash advances – based on future revenue
SBA 7(a) loans – offer term and revolving options
What is the difference between a term loan and revolving credit?
A term loan provides a lump sum repaid over time with interest, while revolving credit offers flexible, reusable funds up to a set limit and charges interest only on the amount used.
Term loans provide stable, structured financing for large projects, while revolving credit offers flexibility for fluctuating or short-term needs. Choosing the right one depends on your business goals, cash flow, and risk tolerance.