Term Loan vs Line of Credit

The short answer

A term loan gives you a lump sum up front and a fixed repayment schedule until it’s fully paid off. A business line of credit (LOC) gives you a revolving limit you can draw from, repay, and draw again—paying interest only on what you use. If you have a one-time, well-defined purchase or project, a term loan is usually the cleaner fit. If you manage recurring or seasonal cash-flow gaps, a line of credit is generally better.

How each product works

Term loan mechanics

You receive a lump sum and repay it over a fixed period (e.g., 24–72 months) via amortized payments covering principal + interest. Pricing can be fixed or variable. Deals can be secured by assets (e.g., equipment, GSA) or unsecured based on cash flow and credit. Term loans are common for capital expenditures, renovations, acquisitions, or business refinancing.

If your primary objective is acquiring a machine, truck, or tool, compare a general term loan to equipment financing, including equipment loans and equipment leases—asset-specific structures often provide longer terms or lower monthly payments via residuals.

Line of credit mechanics

A LOC provides a revolving limit you can draw from as needed. You’re charged interest only on the drawn balance and can repay/redraw repeatedly within the limit. A LOC is ideal for working capital management, inventory turns, timing gaps between payables and receivables, and seasonality. If your receivables backlog is the issue, you might also evaluate invoice/freight factoring or asset-based lending.

Side-by-side comparison

When a term loan is the better choice

Choose a term loan when you want ownership and predictability:

• Buying long-life assets (trucks, trailers, excavators, production machinery, medical devices).
  
  
• Facility build-outs or renovations with a defined budget.
  
  
• Consolidating short-term debt into one predictable payment via business refinancing.
  
  
• Startup investments where a fixed schedule enforces financial discipline (consider CSBFP eligibility).
  
  

Run scenarios in the calculator and compare to an equipment lease with a nominal buyout if lower monthly payments matter.

When a line of credit is the better choice

Pick a line of credit when your need is revolving and timing-driven:

• Bridging AR/collections timing or supplier prepayments.
  
  
• Funding inventory, materials, or mobilization costs for projects.
  
  
• Seasonal dips in cash inflow.
  
  
• Emergency buffer: access to funds without committing to a full term schedule.
  
  

If AR is substantial and predictable, invoice/freight factoring or asset-based lending can unlock more working capital than a traditional LOC.

Cost, structure, and common pitfalls (Canada)

• Rate type: Term loans can be fixed or variable; LOCs are often variable. Model payment sensitivity to rate changes.
  
  
• Term length & total cost: Longer amortization lowers monthly payments but increases total interest—price both 48 vs 60 months in the calculator.
  
  
• Fees & covenants: Expect origination/admin, PPSA registrations on secured files, and light reporting for LOC/ABL.
  
  
• Security: Collateral improves terms but adds obligations (insurance, maintenance, negative pledge). See secured vs unsecured options.
  
  
• End-of-term risk: With term loans, check prepayment privileges/penalties. With LOCs, watch annual renewals and potential limit re-sets tied to performance.
  
  

Alternatives if neither is a perfect fit

• Equipment-specific structures: Equipment loans and leases can yield better cash-flow alignment for assets.
  
  
• Unlock cash from owned gear: Refinancing & sale-leaseback injects liquidity while you keep using the equipment.
  
  
• Working-capital one-time boost: Working capital loan if you need a defined amount now without a revolving facility.
  
  
• Card-heavy businesses: Merchant cash advance for speed (evaluate cost carefully).
  
  

Explore the full suite under Business Loans and Equipment Financing.

Canadian approval checklist

Have these ready to speed approvals (24–48h typical for many files):

• Government ID, company details, and ownership structure.
  
  
• Recent bank statements and any financials available.
  
  
• Quotes/invoices (or select a unit from our inventory—we sell equipment directly).
  
  
• AR/AP agings and major contracts for LOC/ABL.
  
  
• Insurance details for secured transactions.
  
  

Newer firms should ask about CSBFP and in-house financing pathways.

Case study: Picking the right tool saves the deal

Profile: Ontario general contractor with lumpy cash inflows.
Need: $140k for a telehandler + $250k mobilization buffer for projects starting 60–90 days before first progress billings.
Approach: We priced a term loan for the telehandler (60 months, fixed) and a line of credit sized to AR cycles. We also modeled a lease with a 10% buyout in the calculator.
Decision: Term loan for the asset (ownership + predictable payment) and LOC for working capital.
Outcome: On-time equipment delivery, stable cash flow through mobilization, and improved supplier terms after three months of reliable draws/repayments.

FAQs

Is a term loan cheaper than a line of credit?
It depends on rate, term, and usage. A LOC may carry a lower rate on paper, but if you need a fixed amount for years, an amortizing term loan can be cheaper overall.

Can I switch from a LOC to a term loan later?
Yes. Many clients convert a portion of their revolving balance into a fixed business refinancing schedule once usage becomes permanent.

Do startups qualify for either option?
Often—with collateral, down payment, or a co-signer. Evaluate CSBFP and our in-house financing.

Which is better for buying equipment?
Usually equipment loans or leases—built for asset life and potential residuals.

What if I already own equipment and need cash?
Consider refinancing & sale-leaseback to unlock equity without halting operations.

How do I estimate payments and compare options quickly?
Use our calculator for loan vs. lease scenarios, then feel free to contact our credit analysts for a tailored quote.

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Next step

Run your numbers in the calculator, decide whether a term loan or a line of credit matches your cash-flow reality, and feel free to contact our credit analysts via Contact Us. We’ll structure a lender-ready package—often approved in 24–48 hours.

Are you looking for a truck? Look at our used inventory.
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