Business Financing

Business Line of Credit vs Term Loan: Which is Right for You?

March 13, 2026 8 min read
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Choosing between a business line of credit and a term loan is one of the most important financing decisions you'll make for your Canadian business. Each option serves different needs and comes with distinct advantages. Let's break down everything you need to know to make the right choice.

What is a Business Line of Credit?

A business line of credit works similarly to a personal credit card. You're approved for a maximum amount of credit, and you can draw from it as needed—only paying interest on the funds you actually use. This flexibility makes it ideal for managing cash flow fluctuations and unexpected expenses.

Key Features of a Line of Credit

  • Revolving credit: Funds become available again as you pay down the balance
  • Pay interest only: You only pay interest on money you've borrowed
  • Flexible withdrawals: Access funds anytime up to your limit
  • Short-term typically: Usually 12-36 months with periodic renewals

What is a Term Loan?

A term loan provides a lump sum of capital that you repay over a fixed period with regular payments (monthly, bi-weekly, or weekly). The interest rate is typically fixed, making it easier to budget for repayment. Term loans are best for large, one-time investments.

Key Features of a Term Loan

  • Fixed amount: Receive all funds upfront in a single lump sum
  • Predictable payments: Same payment amount throughout the term
  • Longer terms: Can range from 1 to 10+ years
  • Larger amounts: Typically available for $10,000 to $500,000+

Side-by-Side Comparison

Feature Line of Credit Term Loan
Best For Ongoing working capital, emergencies Large purchases, expansions
Loan Amount $5,000 - $250,000 $10,000 - $500,000+
Interest Rate Prime + 1-5% (variable) 5-15% (fixed or variable)
Repayment Terms Revolving, minimum payments Fixed schedule, fully amortizing
Approval Speed 1-3 business days 3-14 business days

Which Should You Choose?

Choose a line of credit if:

  • Your business has irregular cash flow
  • You need flexibility to borrow as needed
  • You want to handle unexpected expenses
  • You prefer paying interest only on used funds

Choose a term loan if:

  • You have a specific large expense (equipment, real estate)
  • You want predictable monthly payments
  • You're funding business growth or expansion
  • You need a larger amount of capital upfront

Not Sure Which Option is Right for You?

Our financing experts can help you understand your options and find the best solution for your business needs.

Get Expert Advice