Choosing Between Term Loans and Revolving Credit for Business Growth

Quick overview

Term loans give a business a fixed amount up front and predictable monthly payments. Revolving credit (lines of credit) works like a business credit card: you borrow up to an approved limit, repay, and reuse the capacity as needed. Each option supports growth, but they serve different cash-flow patterns and risk profiles.

When is a term loan the better choice?

• Purpose: One-time investments such as equipment purchases, business acquisitions, leasehold improvements, or multi‑year initiatives.
• Payment predictability: Fixed principal and interest schedules help with budgeting.
• Cost: Term loans often carry lower interest rates than unsecured revolving options when collateral or strong financials back the loan (U.S. Small Business Administration guidance on lending suggests term products for fixed-asset financing).
• Example: Buy a $250,000 piece of manufacturing equipment with a 5-year amortization so payments match the asset’s useful life.

When should you prefer revolving credit?

• Purpose: Managing seasonal sales swings, payroll timing gaps, inventory buildup, and supplier payment timing.
• Flexibility: Draw and repay repeatedly; pay interest only on outstanding balances.
• Short-term cost: Revolving lines may have higher variable rates or fees but avoid the cost of repeatedly closing and reopening term loans.
• Example: A retailer draws a line each spring to buy seasonal inventory, repays after the season, and uses the same line next year.

How to decide — a practical checklist

1. Define the use case: Is the need a one-time capital project or recurring working capital?
2. Project cash flows: Can you support fixed amortization, or do revenues fluctuate?
3. Compare all costs: APR, origination fees, commitment or unused-line fees, prepayment penalties, and collateral requirements. (Check Consumer Financial Protection Bureau resources on business borrowing for fee details.)
4. Consider covenants and restrictions: Term loans often include tighter covenants; lines of credit may require periodic reviews.
5. Consider timing and relationship: Banks may offer better pricing to established customers; first build a repayment record on a line before seeking a term facility.

Typical cost and term patterns (general ranges)

• Term loans: Commonly 1–10 years. Secured loans frequently have lower rates; APRs vary widely by lender and credit strength.
• Revolving lines: Often renewal terms of 1 year with variable rates or a spread over prime. Fees for unused commitments or renewals may apply.
  Note: Rate ranges depend on credit, collateral, and market rates—get current quotes before deciding.

Risks and common pitfalls

• Over-borrowing: With lines of credit, easy access can mask poor margins and lead to chronic reliance on short-term debt.
• Mismatched terms: Using short-term credit for long-lived assets can create refinancing risk.
• Hidden costs: Commitment fees, annual review fees, and prepayment penalties can change an offer’s competitiveness.

Application tips and documentation

• Prepare 12–24 months of cash‑flow projections, recent business bank statements, and tax returns.
• For term loans: include a use-of-proceeds statement and equipment invoices.
• For lines: show seasonality and receivable/inventory cycles.
• Build a relationship with one lender: it often improves approval odds and pricing.

Short decision scenarios

• Early-stage startup with irregular revenue: start with a modest revolving line to smooth operations.
• Established business investing in machinery: choose a term loan sized to match the asset life.
• Growing business that needs both: consider a hybrid approach—use a line for working capital and a term loan for fixed investments.

Related reading on FinHelp

• Business Line of Credit vs Term Loan: Choosing by Growth Stage — learn how stage of growth affects the choice (https://finhelp.io/glossary/business-line-of-credit-vs-term-loan-choosing-by-growth-stage/).
• When to Choose a Line of Credit vs a Term Loan — practical decision rules and examples (https://finhelp.io/glossary/when-to-choose-a-line-of-credit-vs-a-term-loan/).

Sources and professional note

This summary draws on small-business lending guidance from the U.S. Small Business Administration and consumer-borrowing resources from the Consumer Financial Protection Bureau (CFPB) (sba.gov; consumerfinance.gov). For comparisons and definitions, consult lender term sheets and authoritative industry guides.

This article is educational and not personalized financial advice. Speak with a certified financial professional or commercial lender to match products to your business’s specific cash flows, credit profile, and growth plan.