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Term Loan vs. Line of Credit: What NJ Business Owners Need to Know

Every business faces critical financial decisions that shape its future. When it comes to securing funds, the choice between a term loan vs. a line of credit can influence not just how much you pay, but how smoothly your business operates day to day.

For business owners in northeastern New Jersey, where markets are competitive and cash flow timing can vary widely, understanding the real differences between these types of commercial loans is essential. One option provides structured, predictable payments ideal for planned investments, while the other offers flexible access to funds to handle fluctuations and unexpected expenses.

Making an informed choice means aligning your financing with your business’s unique goals and financial rhythm. To help you decide, this guide will cover a clear, practical comparison between term loans and lines of credit.

Term Loans Explained

A term loan is a lump-sum loan that is repaid over a fixed period at a predetermined interest rate. These loans are typically used for specific, planned investments, such as: 

— Purchasing equipment
— Expanding facilities
— Financing a large project

Because term loans are amortized, payments include both principal and interest, allowing the loan balance to decrease steadily until fully paid off. Terms can vary widely, often ranging from one to ten years depending on the loan amount, collateral, and lender policies.

Key Features of Term Loans

  • Fixed principal and interest payments: Predictable monthly payments aid budgeting and cash flow planning.


  • Defined repayment schedule: The loan ends once the principal is fully repaid.


  • Purpose-driven: Most lenders expect term loans to be used for capital expenditures or growth initiatives, not ongoing operational expenses.


  • Collateral often required: Secured by business assets, real estate, or equipment to reduce lender risk.

nj small business loan

What Is a Line of Credit?

A line of credit is a flexible loan that provides access to funds up to a predetermined limit. Borrowers can draw from the credit line as needed and repay over time, making it ideal for managing cash flow or unexpected expenses. Typical uses include:

  • Covering short-term working capital needs

  • Managing seasonal fluctuations in revenue

  • Handling emergency expenses

Because interest is only charged on the amount borrowed (not the total credit limit), lines of credit offer greater flexibility than term loans. They often come with revolving terms, allowing borrowers to reuse repaid funds during the credit period, which usually lasts one year or more depending on the lender’s policies.

Key Features of Lines of Credit

  • Flexible borrowing and repayment: Borrowers can access funds as needed and repay on a variable schedule, which helps manage cash flow fluctuations.


  • Interest charged only on funds used: Unlike lump-sum loans, interest accrues only on the outstanding balance, potentially lowering borrowing costs.


  • Revolving credit availability: Once repaid, funds become available again during the credit term, offering ongoing access to capital.


  • Often unsecured or secured: Lines of credit may be secured by assets such as inventory or receivables, but some lenders offer unsecured options based on creditworthiness.

When to Use a Term Loan vs. Line of Credit

Choosing between a term loan and a line of credit depends primarily on your business’s financing purpose and cash flow needs.

Use a Term Loan When:

  • You have a specific, large investment in mind, such as purchasing commercial property or new machinery.

  • You prefer predictable monthly payments to plan your finances more accurately.

  • Your business can support fixed principal and interest payments without compromising operational cash flow.

  • You want to lock in a fixed or stable interest rate, especially when rates are low.

  • You’re financing a project or asset with a long useful life matching the loan term.


Use a Line of Credit When:

  • You need flexible access to funds to cover short-term cash flow gaps or seasonal expenses.

  • Your revenue fluctuates, and you want to avoid the rigidity of fixed loan payments.

  • You require quick funds to seize unexpected opportunities or manage unforeseen costs.

  • You want to minimize interest costs by borrowing only what you need, when you need it.

  • You’re managing working capital rather than financing a large capital expenditure.

Cost Considerations: Interest, Fees, and Repayment Terms

While interest rates on term loans are often fixed or capped, lines of credit tend to have variable rates tied to benchmarks such as the prime rate. This variability can mean higher costs if market rates rise.

Additionally, lines of credit may involve maintenance fees, draw fees, or annual renewal charges; costs that don’t usually apply to term loans. These fees can add up and should factor into your decision-making.

Term loans usually come with origination fees and sometimes prepayment penalties if you repay early, whereas lines of credit often allow more flexible repayment without penalties.

Impact on Cash Flow and Financial Planning

The fixed monthly payments of term loans require steady cash flow to avoid defaults. For businesses with predictable revenues and the ability to commit to regular payments, term loans provide structure and financial discipline.

Lines of credit, by contrast, offer flexibility but can become costly if the borrower continually carries high balances or relies heavily on the credit line for long-term financing needs. They are best treated as a tool for short-term liquidity management, not long-term debt.

What New Jersey Businesses Should Keep in Mind

Northeastern New Jersey’s economy includes manufacturing firms, distribution centers, tech startups, and service providers. These industries often have differing financing needs:

  • Manufacturers might prefer term loans to acquire or upgrade equipment, given their capital-intensive operations.

  • Retailers and seasonal businesses benefit from lines of credit to manage inventory purchases and fluctuating sales cycles.

  • Startups and growing businesses often combine both: a term loan for a specific expansion and a line of credit for working capital flexibility.

Business owners should also maintain updated financial documentation such as tax returns, profit and loss statements, and balance sheets as lenders often require detailed financial disclosures due to the competitive and complex market environment.

Explore the Best Commercial Loan Options for Your NJ Business

Ultimately, the choice between a term loan and a line of credit should align with your business strategy, operational rhythms, and financial capacity. While term loans bring structure and clarity for long-term investments, lines of credit provide essential flexibility to navigate day-to-day cash flow challenges.

Are you looking to explore these options, or another type of commercial loan? If so, visit one of our branches at Freedom Bank today. View our locations to find the nearest branch to your business or contact us anytime to learn more.

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