Business line of credit vs term loan: which to use

A term loan gives you a lump sum repaid on a fixed schedule, while a line of credit gives you a limit you can draw on, repay and reuse.

By Promissory.ca Editorial Team Reviewed against official Canadian sources Last updated: 2026-09-16

The difference in one line

A term loan is a fixed amount of money advanced once and repaid over a set period. A line of credit is a revolving facility: the lender approves a limit, you draw what you need, and as you repay, the available credit opens up again. Choosing between them comes down to whether you are funding a specific purchase or managing money that moves up and down.

How a business line of credit works

A line of credit is built for flexibility. The lender sets a maximum limit, and you draw only what you need, when you need it. Interest is typically charged on the amount you actually use rather than the full limit, which can make it cheaper than a term loan when your borrowing needs are intermittent. As you repay, the credit becomes available again.

Some lines are secured against assets or receivables, while others are unsecured and priced to reflect that higher risk. A line can be reduced or withdrawn by the lender in some circumstances, so it is not a substitute for long-term capital.

How a term loan works

A term loan is advanced once and repaid on a fixed schedule, usually with equal payments. Because the schedule is predictable, a term loan suits a one-time need such as buying equipment, renovating a space or acquiring another business. The rate may be fixed or variable, and some loans carry prepayment terms that matter if you expect to pay the balance early.

Side-by-side comparison

Matching the tool to the need

Use a term loan when the money funds something that will generate income over time, such as equipment or a fit-out, and you want the debt cleared on a predictable schedule. Use a line of credit when the need is seasonal, tied to inventory, or linked to the gap between paying suppliers and collecting from customers. Using the wrong tool is a common reason businesses feel stretched: a long-term need funded by a revolving line can be called in, while a short-term gap funded by a term loan costs more than it should.

Cost and interest

A line of credit often carries a rate that moves with the lender prime rate, so payments can change as rates change. A term loan may offer a fixed rate, which makes budgeting easier, or a variable rate, which moves with the market. In both cases, compare the annual percentage rate and any fees, not just the headline rate. A lower rate with higher fees can cost more overall.

Security and personal guarantees

Both products can be secured or unsecured. Secured business lending may require a general security agreement over business assets, and many lenders also ask the owner for a personal guarantee. A personal guarantee makes the owner personally liable if the business defaults, so it should be read carefully and, where possible, negotiated to a limited amount. The obligations attached to a facility often matter more than a small difference in rate.

Tax treatment

Interest on money borrowed to earn business income is generally deductible for tax purposes, subject to conditions. That applies to both a line of credit and a term loan where the funds are used for business purposes. Keep records showing how the money was used, and confirm your situation against Canada Revenue Agency guidance or with a tax professional.

How lenders set the limit or amount

With a line of credit, the lender sets a limit based on your revenue, the strength of your receivables and the security you can offer. The limit can be reviewed periodically and adjusted as the business changes. With a term loan, the lender decides the amount by looking at the cost of what you are buying and what the business can repay from cash flow. In both cases, the amount on offer reflects the lender view of risk, so improving your records and your credit profile before you apply can raise the number.

Can you use both?

Many businesses do. A term loan funds the major purchase, and a line of credit smooths the weeks when cash is tight. Used carefully, the two complement each other. The risk is leaning on the line to cover a shortfall the business cannot actually repay, which turns temporary flexibility into permanent debt. Review both facilities regularly to make sure the balances are moving in the right direction.

How to choose

1. Write down exactly what the money is for and how long you need it.
2. If the need is a one-time purchase, favour a term loan with a schedule you can meet.
3. If the need repeats or fluctuates, favour a line of credit.
4. Compare the annual percentage rate, fees and prepayment terms across lenders.
5. Ask what security and guarantees are required, and how far your personal exposure reaches.
6. Check whether the rate is fixed or variable, and how that affects your budget.

Where a calculator helps

Running the numbers through a business loan and total-cost calculator shows what a term loan will cost over its schedule and helps you estimate the cost of drawing on a line. Promissory.ca is not a lender and does not arrange business loans. We publish plain-language information and may receive compensation from lending partners.