Line of credit vs term loan, in short: a term loan pays out once and is paid back in equal installments over a set term, which suits one purchase with a known price and a long working life. A credit line is drawn, paid down and drawn again, which suits costs that come and go. For San Rafael, CA owners, the worked examples below compare both on the same purchase. Call (628) 301-6791 to talk through a term.
A term loan fits one purchase with a known price; a credit line fits costs that repeat. In the $30,000 example, carrying the purchase on a credit line at the same monthly payment takes 55 months and costs more interest than the 48-month term loan. The term should not run longer than the item stays in use.
When a one-time purchase suits a term loan
A purchase suits a term loan when four things are true together:
- The price is known before the money is needed, from a quote, an invoice or a purchase agreement
- The money goes out once, not in pieces over months
- What is bought keeps earning for longer than the loan runs
- A fixed monthly payment fits the budget better than a balance that moves
Illustration only, invented figures: a sit-down restaurant replaces its range line and the dining room chairs for $62,000. On a 60-month term at an invented 10.75% annual rate, the restaurant books one payment of $1,340.31 on the same day each month and knows from the start that the purchase costs $80,418.60 in all. The equipment is in scope; moving walls or gas lines in the kitchen is building work and outside this site.
For context on the trade itself: of the 280 full-service restaurants that 2023 County Business Patterns recorded in Marin County, CA (NAICS 722511), 225, or 80.4%, had five or more employees (our arithmetic from the size table).
Term loan or credit line for the same need?
Often the honest answer is both, for different parts of the same need. Where only one product can be used, the example below shows what happens when a long-lived purchase goes on a line instead of a term loan.
| Product | Annual rate (invented) | Months to pay off | Interest paid |
|---|---|---|---|
| Term loan | 10.9% | 48 | $7,147.68 |
| Credit line draw paid down at the same amount | 15.5% | 55 | $11,883.48 |
Paid at the same $773.91 a month, the draw takes 55 months to clear and carries $4,735.80 more in interest than the term loan. It also keeps part of the line in use for more than four years, when a line is meant for short gaps such as payroll ahead of a large receivable or a supplier order. Draw periods and paydowns are set out on the line of credit page.
Matching term length to the purchase in San Rafael, CA
The term should end before the purchase stops being useful. A term shorter than the working life keeps the payment higher; a term longer than the working life means paying for something already replaced.
| Purchase | Working life in this example | Term to consider |
|---|---|---|
| Card terminals and booking tablets | 3 years | 24 to 36 months |
| A commercial range line or a walk-in cooler unit | 7 to 10 years | 60 to 84 months |
| Buying out a partner’s share of the business | As long as the business runs | 60 to 120 months |
Illustration only, invented figures: $9,600 of card terminals and tablets at an invented 12% costs $318.86 a month over 36 months and $213.55 over 60. The 60-month version looks lighter, but it runs two years past the 3-year life in this example and costs $1,334.04 more in total. For machines and fixtures, equipment financing can tie the term to the equipment itself; the term loans page covers business purchases and other costs that are not one machine.
Reading prepayment and fee terms
Two lines of an offer change its cost as much as the rate does: what is charged at signing, and what happens if the balance is paid early.
Illustration only, invented figures: take $50,000 borrowed for 36 months at an invented 10.5%, which sets each payment at $1,625.12. If the offer charges a 3% fee taken from the proceeds, the business receives $48,500 but pays back $58,504.32 over the term. After 18 payments the balance owed is $26,956.22, while the remaining 18 payments total $29,252.16. Where the agreement charges interest only for the months the money was out, paying off at that point saves $2,295.94. Where it fixes the full interest at signing, or adds a payoff charge, the saving shrinks or disappears.
Lines of the agreement worth reading next to the rate:
- A signing fee, and whether it is deducted from the money paid out or rolled into what is owed
- How often payments are collected: monthly, or weekly
- Whether an early payoff saves the remaining interest, and any payoff charge
- Late charges and the grace period, if there is one
- What secures the loan: the equipment bought, other business assets, or the owner signing personally
Each of those terms sits in the agreement, and a funding partner sets them. Reading them before signing, and asking for the payoff figure in writing, takes little time. Other articles for San Rafael, CA owners are on the blog.
By Ravenview Advances · Updated
