Comparisons
Business term loan versus business line of credit
Keep your average drawn balance under about 56 percent of the commitment and the line costs less than a term loan. Above that, the term loan wins. Worked at $250,000.
The short version. Take the term loan when you know the exact amount, you need all of it now, and the payback is measured in years: an acquisition, a build out, a piece of the business you are buying. Take the line when the need is recurring and you cannot predict the timing: payroll gaps, inventory cycles, a seasonal dip. The break even is a single number and it is your average drawn balance.
Owners usually pick between these two on feel rather than math, and the feel is normally wrong. A line sounds cheaper because you only pay for what you use. A term loan sounds safer because the payment is fixed. Both instincts survive contact with a spreadsheet only about half the time. Here is the actual arithmetic on $250,000.
The same $250,000, priced both ways
Assume a business with $600,000 a month in deposits, three years of profitable returns, and an owner at 690. That file gets a term loan of $250,000 at 13 percent over five years, or a line of credit with a $250,000 commitment at 13 percent on the drawn balance, a 0.5 percent unused line fee, and a $750 annual fee. Same rate on both, which is generous to the line and keeps the comparison clean.
| Business term loan | Business line of credit | |
|---|---|---|
| What you receive | $250,000 wired at closing | $250,000 of availability |
| Rate | 13 percent, usually fixed | 13 percent, usually variable |
| Payment | $5,688 a month for 60 months | Interest on what is drawn |
| Interest over 5 years | $91,280 | $65,000 at 40 percent average draw |
| Interest if fully drawn 5 years | Not applicable | $162,500 and you still owe $250,000 |
| Other cost | 2 percent origination, about $5,000 | $750 a year, plus 0.5 percent unused fee |
| Reusable | No | Yes |
| Can the lender take it away? | No, once funded | Yes, on review or a material adverse change |
| Time to close | 3 to 14 days non bank, 3 weeks bank | 2 to 10 days non bank, 3 to 6 weeks bank |
| Best for | One known amount, long payback | Recurring unpredictable gaps |
The break even, stated plainly
A five year term loan at 13 percent generates $91,280 of interest on $250,000. Work backwards from that number and the average outstanding balance across those five years is about $140,400, which is 56 percent of the original $250,000. That single figure is the whole comparison.
Keep your average drawn balance below about 56 percent of the commitment and the line costs less than the term loan. Run above 56 percent and the term loan is cheaper, because you are paying the same rate plus annual and unused line fees on top. Nothing else in this comparison is as decisive as that one ratio, and it is measurable. Pull twelve months of statements, average your outstanding balance, divide by the commitment.
The second break even is the one that ruins people. Draw a $250,000 line and hold it at full balance and you pay $32,500 a year forever, with the principal untouched. Over five years that is $162,500 against the term loan's $91,280, and at the end of it the term loan borrower owes nothing while the line borrower owes the entire $250,000. A revolving product used as permanent financing is the most expensive structure on this page by a wide margin.
Who each one is actually for
- The term loan is for you if the amount is known and the asset outlives the loan. Buying a competitor, building out a second location, funding a hire whose payback is 24 months, or consolidating expensive short term debt into one payment. See consolidating business debt.
- The line is for you if your working capital need swings and reverses. A distributor buying inventory in March and selling it in June, a contractor covering materials before a draw, a staffing firm covering payroll before the client pays. You draw, you collect, you repay, you draw again.
- Take both if you can, and most solid files can. A term loan for the fixed project and a line held in reserve for the swings is the structure most established businesses eventually land on. They price differently because they do different work.
- Take neither if the plan is to use borrowed money to cover an operating loss. Check the arithmetic in when not to borrow first.
Qualification is nearly identical for the two, which is unusual. Both typically want two years in business, filed returns showing profit, a DSCR around 1.20x or better, and a mid 600s FICO. Lines sometimes ask for slightly more, because the lender is committing to future money and has to underwrite a business it will not see again for a year. If your file clears one it usually clears both, which means the choice is genuinely yours rather than the market's.
The three things that decide it in practice
- Discipline. A term loan amortizes whether you feel like it or not. A line requires you to voluntarily pay down principal that nobody is demanding. If you know you will not, the term loan is the honest choice and the more expensive looking option is actually the cheaper one.
- Rate type. Term loans are usually fixed. Lines are usually variable off Prime or SOFR. A 200 basis point move on a fully drawn $250,000 line is $5,000 a year you did not plan for. Ask whether there is a rate cap.
- What the next lender sees. A term loan appears on your debt schedule as a known, shrinking obligation. An open line appears as $250,000 of potential debt, and conservative underwriters count the full commitment against you whether you have drawn it or not. If an SBA application is coming, that matters.
What we do with this
Exp Capital Solutions is a broker, not a lender. We do not fund term loans or issue lines and we do not set anyone's pricing. What we do is pull your average drawn balance out of twelve months of statements, run it against the 56 percent break even, and tell you which structure your own history says you should take. When the answer is a line, we say so, even though a line typically pays a broker less than a term loan of the same size. Then we put the offers side by side with the rate type, the fees, the cleanup requirement, and the review terms all in one place.