Bank Lines of Credit & Term Loans

A bank line of credit is a revolving credit facility, similar in structure to a business credit card, that a business can draw against up to an approved limit and repay over time, with available credit restored as the balance is paid down. A bank term loan, by contrast, provides a lump sum up front that is repaid in fixed installments over a set period, typically with a defined interest rate and maturity date. Both products are usually offered by banks and credit unions and are generally reserved for businesses that can demonstrate an operating history and financial stability.

A line of credit is often used to manage short-term working-capital needs: covering payroll during a slow season, bridging the timing gap between paying suppliers and collecting from customers, or handling unexpected expenses. A term loan is more commonly used for a defined, one-time purpose, such as renovating a facility, funding a planned expansion, refinancing existing debt, or making a larger purchase that doesn't fit neatly into equipment financing.

Banks typically look at time in business, historical and projected cash flow, business and personal credit history, existing debt obligations, and often collateral. Many banks favor businesses with several years of operating history and consistent revenue, which can make these products more difficult for newer businesses to access compared to some alternative financing options. Underwriting standards, required financial ratios, and collateral expectations vary by institution and cannot be predicted with certainty in advance.

A line of credit typically requires interest-only or minimum payments on the drawn balance, with the full principal due on the outstanding draw as it matures or is renewed, similar in concept to a revolving card but often at a lower rate given the bank relationship and any collateral pledged. A term loan typically involves equal (or gradually adjusting, for variable-rate loans) payments of principal and interest over a fixed schedule, commonly ranging from one to several years depending on the loan's purpose and size.

Both products carry the general risk that a business commits to a repayment obligation regardless of whether revenue performs as expected. Lines of credit can be reduced or not renewed by the bank at certain review points, which can create a cash-flow gap if a business has come to rely on that available credit. Term loans that are secured by business or personal collateral put that collateral at risk of loss if payments are missed. Variable-rate products can also become more expensive if benchmark interest rates rise over the life of the loan.

Banks commonly request business tax returns, financial statements (profit and loss, balance sheet), bank statements, a business plan or explanation of use of funds, entity formation documents, and personal financial information for owners, including personal tax returns and a personal guarantee. Collateral documentation, such as titles or appraisals, may also be required for secured products. Requirements vary by bank and by the size and purpose of the request.

Bank financing for small and mid-sized businesses commonly requires a personal guarantee from one or more owners, meaning the owner is personally responsible for repayment if the business cannot pay. Depending on the loan, a personal guarantee may also be paired with a lien on business or personal assets. Owners should understand exactly which assets, business and personal, could be affected before signing.

Traditional bank financing may be a poor fit for a very new business without an established financial track record, for a business that needs funds faster than a typical bank underwriting timeline allows, or for a business unable to offer the collateral or financial ratios a given bank requires. In those cases, other categories covered in this Funding Options section may be more realistic starting points, though every situation is different.

• Is this a revolving line of credit or a fixed-term installment loan?
• What collateral or personal guarantee is required?
• Is the interest rate fixed or variable, and what index does it track?
• What fees apply, such as origination, draw, unused-line, or prepayment fees?
• Under what circumstances can the line be reduced, frozen, or not renewed?

Beyond the stated interest rate, origination fees, annual or unused-line fees, appraisal or collateral-related costs, and prepayment penalties can all affect the true cost of bank financing. Comparing the annual percentage rate (APR) alongside these fees, rather than the interest rate alone, gives a more complete picture of what a given line or loan will actually cost over its term.

This page is general education about how bank lines of credit and term loans commonly work and is not a specific offer, recommendation, or promise of approval, rate, or amount for any particular business.