Both products lend money to a business, and they solve different problems. Matching the instrument to the need is the part that determines whether the borrowing works.
Revolving credit funds timing, not assets
A line of credit allows repeated borrowing and repayment up to a limit. It exists to bridge the gap between paying suppliers and collecting from customers.
Interest accrues only on the drawn balance, so a facility sitting unused costs little beyond commitment or non-use fees.
The design assumes the balance fluctuates and returns toward zero as receivables convert. A line that stays permanently drawn is functioning as term debt without a repayment schedule.
Term debt matches a fixed life to a fixed asset
A term loan advances a set amount repaid over a defined period, usually with a schedule of principal and interest.
Terms are set against the useful life of what is being financed, so equipment is financed over years and real estate over a longer horizon.
Financing a long-lived asset with a short facility creates repayment obligations before the asset has generated the cash to meet them, which is a common cause of distress.
Underwriting looks at different things
Line of credit underwriting focuses on the quality and turnover of receivables and inventory, because those are what repay the balance.
Term loan underwriting focuses on sustained cash flow, since repayment comes from operations over years rather than from converting current assets.
Both typically involve security interests over business assets and, for smaller firms, guarantees from significant owners.
Facilities carry conditions beyond the rate
Lines are usually reviewed annually and can be reduced or withdrawn at renewal, which makes them a less certain source of funding than the limit suggests.
Clean-down provisions requiring the balance to reach zero for a period each year test whether the facility is being used as intended.
Term loans commonly carry covenants tested periodically, and prepayment terms that determine the cost of refinancing before maturity.
Cost comparison requires more than the rate
Quoted rates on revolving facilities are often variable and tied to a benchmark, while term rates may be fixed, which makes headline comparison misleading.
Origination fees, unused line fees, annual review fees and collateral monitoring charges all contribute to the effective cost.
Pricing, benchmark indices and underwriting standards change with credit conditions, so a business planning to borrow should work through current terms with a banker and its own accountant.