What is the core difference?
A revolving line gives you a limit to draw, repay and draw again, with interest usually charged only on what is outstanding. A term loan gives you a lump sum repaid on a fixed schedule, typically monthly. One is built for flexibility; the other is built for predictability over a set period.
The practical question is how long the money stays out. If cash comes back within a few months as a cycle completes, a line of credit fits. If the money becomes a permanent part of the business, a term loan fits.
When does a revolving line work best?
A line works best for recurring, self-liquidating needs: buying inventory that sells within the season, covering payroll while invoices are collected, or handling a timing gap between paying suppliers and getting paid. Each draw has a clear source of repayment, so the balance naturally rises and falls through the year.
- A wholesale distributor draws to stock up before its busy months and repays as sales are collected.
- An engineering firm draws for payroll during a milestone-billed project.
- A retailer covers a supplier invoice and repays within weeks as goods sell.
| Factor | Revolving line of credit | Term loan |
|---|---|---|
| Funding | Draw as needed up to a limit | Lump sum upfront |
| Repayment | Varies with balance; reusable | Fixed schedule, usually monthly |
| Interest | Usually on drawn balance only | On the full outstanding loan |
| Best for | Inventory, payroll timing, receivables gaps | Equipment, expansion, permanent working capital |
| Review | Often renewed annually | Underwritten once for the full term |
When does a term loan work best?
A term loan works best for investments that produce value over years: machinery, an office build-out, a new location, technology systems or a permanent increase in working capital. The fixed payment can be matched to the cash the investment is expected to generate, and your line stays available for everyday swings.
A manufacturer adding a CNC machine, an IT services company building out a network operations center, or a firm expanding into a second office are classic term loan uses. For expansion specifically, see funding an expansion with a term loan.
What goes wrong when the product does not match the need?
Using a line for long-term investments leaves it fully drawn, removes your cushion and can lead to a smaller renewal or a request to move the balance onto a repayment schedule. Using a term loan for a short gap means paying interest on a lump sum that sits idle once the gap closes.
The most common mismatch we see is a line that slowly became permanent financing. The company grew, inventory and receivables grew with it, and the line never came back down. At renewal, the funder sees a fully used facility. Splitting the permanent portion into a term loan usually fixes this.
Can a company use both at the same time?
Yes, and many established companies do. A common structure pairs a revolving line for working capital swings with a term loan or equipment financing for long-lived investments. The two can come from the same funder or different ones, as long as existing agreements allow additional debt and liens.
Having two funding relationships also adds resilience. If a bank reduces or freezes a line, a separate term facility keeps part of your financing stable. Read what to do when a bank reduces your line for that scenario.
Which is easier to qualify for?
Neither is universally easier. A line is reviewed for ongoing risk and often renewed annually, so funders focus on consistent cash flow and usage patterns. A term loan is reviewed for the ability to carry a fixed payment over its life. Requirements vary by product and funder, and strong financials help with both.
For secured options, a line may rely on receivables or inventory, while a term loan may rely on the equipment or assets it buys. Our qualifications guide covers what funders weigh. When you know what you need, apply once and compare both.
Frequently asked questions
Can I use a line of credit to buy equipment?
You can, but it is usually a poor match. Equipment pays back over years, so the line stays drawn and loses its flexibility. Equipment financing or a term loan typically spreads the cost over the asset's life and keeps the line available for short-term needs.
Is a line of credit cheaper than a term loan?
Not necessarily. A line often costs less in practice because you pay interest only on what you draw, but rates and fees vary. A term loan charges interest on the full balance, yet may carry a lower rate when secured. Compare total cost based on how you will actually use the money.
What happens if the line stays fully drawn?
A line that never comes down suggests a permanent need. At renewal, the funder may reduce the limit, decline to renew or ask to move the balance onto a repayment schedule. Some lines also have a clean-up requirement. Moving the permanent portion to a term loan usually helps.
Can I have both products with different funders?
Often, yes, if your existing agreements allow it. Check for restrictions on additional debt and liens, and consider asking for a specific lien on financed equipment so other assets remain available for your line. Keep every funder current on your financials.
How do I decide how much of a need is permanent?
Look at your line balance over the past year. The lowest balance it reached is a rough indicator of the permanent portion. Growth in average inventory or receivables that is not coming back down also points to a permanent need better suited to a term loan.
Match each need to the right product
Tell us what you are funding and for how long, and we will compare lines and term loans side by side.
Updated September 14, 2026 · 1Prime Capital Funding Team