How to Decide Between a Card, a LOC, and a Term Loan

Compare business credit cards, lines of credit, and term loans using cost, timing, and cash flow to pick the right capital source.

1. Calculate your true cost of capital for each option. Get the APR for term loans, but for cards and LOCs, calculate the effective rate based on your actual usage pattern. If you'll carry a $50,000 balance for 6 months on a card at 18% APR, your cost is $4,500. Compare that to a 6-month term loan at 12% APR ($3,000 total cost) or a LOC where you'll draw and repay sporadically.
2. Match the repayment structure to your cash flow. Use cards for expenses you can pay off within 30-60 days. Use LOCs when you need to draw and repay multiple times—seasonal businesses, project-based work, or covering gaps between receivables and payables. Use term loans when you need a lump sum for equipment, expansion, or other investments with predictable payback periods.
3. Factor in speed and administrative overhead. Cards and existing LOCs give you money in minutes. New LOCs take 1-3 weeks to establish. Term loans take 2-8 weeks and require more documentation. If you need $25,000 tomorrow for a time-sensitive opportunity, your options narrow to cards or an existing LOC, regardless of cost.
4. Consider your debt capacity and covenant requirements. Cards typically have the highest rates but the lowest barriers and no covenants. LOCs often require monthly or quarterly financial reporting. Term loans may include debt-to-equity ratios, minimum cash flow coverage, or other operating restrictions. Factor these requirements into your total cost of capital.
5. Run the numbers on tax deductibility and accounting treatment. All three options generate deductible interest expense, but the timing differs. Card and LOC interest is deductible when paid. Term loan interest follows an amortization schedule. For larger amounts, term loans often provide better rates that more than offset any timing disadvantages on the tax deduction.