A term loan and a line of credit both put money in your account. They answer different questions.
A term loan buys something. A line of credit covers timing.
That sounds like a distinction for bankers until the wrong one is sitting on your balance sheet. Then it turns into a payment you are still making in year four on inventory you sold in year one, or a building financed on a revolving line that was supposed to rest every winter. Both are fixable. Both are much cheaper to fix before the money moves.
Here is how a business line of credit actually works, where it belongs relative to everything else you owe, and one example from our own market with the real months in it. If you want the wider view first, our small business loans page lays out every structure side by side.
What a business line of credit actually is
A business line of credit is a revolving limit a business draws against as it needs cash, paying interest only on the amount drawn, with the limit refreshing as the balance is repaid. It is an approved capacity, not a lump sum. Three things follow from that, and they are the whole product.
You draw what you need. The limit is capacity, not a balance. Approved for $250,000 and drawing $40,000 means you owe $40,000.
Interest accrues only on the drawn balance. Money you have not drawn does not cost interest. That is the single biggest practical difference from a term loan, where the full amount funds on day one whether you needed all of it that day or not.
The limit refreshes as you repay. Pay $40,000 back and the full $250,000 is available again. This is why a line is called revolving. A term loan is the opposite: it amortizes down on a fixed schedule and does not come back.
Most business lines carry a term of a year and are reviewed at renewal. The line does not disappear at the end of the year. It gets looked at, in the same conversation where you and your lender talk about how the year went.
Two kinds of line, and they are not interchangeable
A revolving line is the one described above. Draw, repay, draw again, as many times as the year requires.
A straight line, sometimes called a draw line, has a fixed commitment and no re-advances. Every dollar drawn is a dollar of the total budget, and repaying does not free it up again. That is how a commercial construction loan is built: it funds the project in stages as the work is completed, then pays off or converts to permanent financing when the building is done.
Both get called a line of credit in conversation. If a building project is involved, it is almost certainly the second one, and the difference is worth confirming out loud.
Is a small business loan installment or revolving?
It depends entirely on which one you took, and this is worth being precise about because the two words describe two different products.
An installment loan funds once and is repaid in scheduled payments of principal and interest until the balance reaches zero. A commercial term loan, an equipment loan, and a commercial mortgage are all installment debt.
A revolving loan is a limit you draw against, repay, and draw against again. A business line of credit is revolving. So is a business credit card, though the two behave very differently in almost every other respect.
The reason people ask is usually that they are reading a credit report or a financial statement and the two are reported differently. On the operating side, the reason it matters is the one in the next section.
Build the debt stack before you pick the product
Every business has a debt stack, whether anyone has ever called it that. It is the whole set of what the business owes and how each piece is structured: the operating line, the equipment notes, the mortgage on the building, a seller note from an acquisition, the card. Most owners meet these one at a time, as each need comes up. The stack is what they add up to, and it is the thing worth spending time on.
One rule governs the whole of it, and it is worth more than any single product decision. Brian Wagner, our Chief Lending Officer, puts it this way:
"Most of the time I spend on structure is not about whether we can do the loan. It is about whether the debt matches what it is buying. Short-term needs on short-term debt, long-term needs on long-term debt. Get that right and most of the rest gets easier."
Brian Wagner, Chief Lending Officer, Security Bank & Trust Co.
Getting that wrong is one of the more reliable ways a genuinely profitable business ends up in trouble. Not because any individual loan was a bad loan. Because the stack stopped matching what the money bought.
A long-term need sitting on short-term debt
A business buys a piece of equipment, or covers a down payment on a building, out of the line of credit. Usually for a good reason at the time: the line was already there and the term loan would have taken a conversation.
Two things follow. The line stops resting, because nothing about a twenty-year asset produces cash in ninety days to pay it back. And the capacity is gone when the season arrives, so the business is short at exactly the moment the line was supposed to be doing its job. Then the annual renewal comes around on a balance that has not moved in a year, and a review that should have been routine is not.
A short-term need sitting on long-term debt
The reverse is quieter, and it lasts longer. A business terms out a year of inventory over five years. The inventory sold in four months. The payment is still there in year four, and every dollar of it is a dollar not available to buy this year's inventory. The business has borrowed against its own future working capital to pay for goods it already sold.
So the real question is which rung, not which product
Ask one thing about the money before you ask anything else. Will the thing this money buys still be here in five years? If yes, it belongs on term debt. If no, it belongs on a line. That single question sorts most of the stack.
| The money is buying | It turns back into cash | Where it belongs in the stack |
|---|---|---|
| Spring inventory, job materials, payroll ahead of an invoice | Inside the operating cycle, weeks to months | Line of credit |
| A machine, a truck, a fleet, a system | Over the asset's working life, years | Equipment financing or a term loan |
| The building you operate from, or an investment property | Over decades | Commercial real estate financing |
| A project you are building or renovating | When the project completes or converts | Construction financing |
| A business, a partner buyout, a book of accounts | Out of the earnings you purchased | A business acquisition loan |
Some requests do not fit a single rung cleanly, and that is normal. A longer term or a smaller equity contribution than a conventional structure allows is often the point of SBA loans in Minnesota. Raise it early rather than late.
If you are not sure where a piece of the stack belongs, that is the conversation to have before the money moves rather than after. It is also by far the cheapest version of it.
A Carver County example, with the months in it
Take a garden center and landscape contractor outside Waconia. The business is profitable and has been for years. It also has a cash flow problem every single spring, and it is not a profitability problem.
Here is the calendar.
March. Nursery stock, mulch, seed, fertilizer, hard goods. Suppliers want to be paid on their terms, and the good pricing is on the early orders. The seasonal crew comes back on payroll before there is much to do.
April. More inventory, full crew, equipment out of winter storage and serviced. Retail sales start slowly. Commercial installs are bid but not billed.
May and June. The business does most of its year. Retail moves. Installs go in. Commercial customers are invoiced on net 30, so the work done in May is collected in late June.
July through October. Collections come in. Maintenance contracts bill monthly. The balance comes down.
November through February. Quiet. Some snow work. Nothing much to finance.
Say $220,000 goes out between the first of March and the end of April, and the first meaningful money comes back the third week of May. That is roughly eighty days of the business funding itself before the season pays for anything.
With a line of credit, the business draws through March and April, carries a peak balance for a few weeks, and pays it down through June and July as the receivables land. From August to February the balance sits at or near zero, and there is no interest accruing on money that is not drawn. The capacity is still there in March when it is needed again.
With a five-year term loan for the same $220,000, the business is making a payment every month of the year, including the five months when there is nothing to finance, and it is still making that payment in 2031 on plants that were sold in 2026.
Same amount of money. Very different year.
The same shape shows up across our market
The garden center is one version of a pattern that repeats across the industries we serve, and the shape changes with the geography.
- Row crop and livestock. Seed, fertilizer and fuel go out in April across McLeod and Sibley Counties. Grain sells in October. The farm operating loan is how that gap gets bridged, and it is the oldest use of the product on our books.
- Site work and residential development. Growth around Waconia and Cambridge means a short season on frozen ground, mobilization costs up front, and retainage held until closeout. The construction loan covers the build. The line covers payroll and materials before the draw arrives.
- Snow and ice management. Commercial contracts in the west metro get signed in September, salt and equipment are bought in October, the work happens December through March, and seasonal billing rarely matches the cost curve.
- Professional practices. A dental practice or a law firm bills in arrears, collects on client terms, and still makes payroll on the fifteenth and the thirtieth. Financing for professional services is built around exactly that gap.
- Manufacturing and food processing. Not seasonal, but the same math. A large order out of a plant in Winsted or Hamburg means buying materials and running labor months before the customer pays.
- Season retail and hospitality. A business that earns most of its year between Memorial Day and Labor Day still has twelve months of expenses.
If your business has a predictable gap between paying for something and getting paid for it, that gap is what a line of credit is for.
What a line of credit is not for
Three uses come up regularly, and all three are signals to have a different conversation.
An operating loss. A gap closes on its own when the receivable is collected or the inventory sells. A loss does not. Drawing on a line to cover a shortfall that will not reverse does not finance the gap, it postpones the decision, and it usually costs the business its borrowing capacity at the moment it most needs it.
A long-lived asset. The building, the excavator, the down payment. Those belong on other rungs, and the table above points at each of them.
A permanent increase in working capital. If the business has grown and now simply needs to carry more inventory and more receivables all the time, that is a real financing need. Sometimes the right answer is a bigger line. Often the better answer is a term loan that funds the permanent portion and a line that handles the seasonal swing on top of it. That is a debt stack question, and it is worth asking out loud.
The diagnostic is simple. If the balance on the line never comes down, the structure usually needs a look. Not the business, necessarily. The structure.
What a lender is actually looking at
Sizing a line is not a menu. It comes out of the business's own numbers, and the conversation tends to cover four things.
Your operating cycle. How many days pass between paying for something and collecting on it. This is the single most useful number in the conversation, because the line exists to cover exactly that many days.
Receivables and inventory. These are usually what a line is secured by, so what they are and how quickly they turn matters as much as how large they are. Receivables aging is not a formality. It is the collateral.
The peak, not the average. A line sized to your average borrowing runs out in the month you need it. The peak of your borrowing is usually the trough of your revenue, which is why the seasonal shape of the year matters more than the annual total.
Whether the balance rests. Lenders look at whether the line comes down during the year, because that is the evidence it is funding timing rather than something else. This is also why the renewal conversation is usually short when the pattern is clean.
None of this is a checklist to pass. It is the same information you already use to run the business, organized so someone outside it can see the shape.
Two things are worth reading before that first meeting. Our guide to how to get a business loan in Minnesota walks through the way a lender reads a financial statement. And if you want the practical version, here is how to prepare for a working capital loan approval, down to what to have in the folder.
Where the line sits next to everything else
A line of credit works best when it is connected to the accounts the business already runs through. Deposits land in the operating account, the line covers the gap, and both sit in front of the same lender who can see the whole stack rather than one piece of it at a time.
That is also why a line is rarely the only thing on the table. Most of the businesses we work with end up with some combination: business checking and savings accounts for the day to day, a line for the seasonal swing, and term debt for whatever they own.
Why a local lender matters on a seasonal line
Security Bank & Trust Co. has been lending here since 1935. The footprint runs from the McLeod County towns where the bank started, Glencoe, Brownton, Plato and Winsted, west into Sibley County at New Auburn, across Carver County through Waconia, Chaska, Cologne, Mayer, Hamburg and New Germany, into the west metro at Minnetonka, Eden Prairie and Wayzata, and north through Ramsey, Cambridge, Isanti and North Oaks.
That matters more on a line of credit than on almost any other loan, because a line is underwritten against a pattern rather than an asset. Your credit is presented and decided here, not in another state, by people who can drive out and see the operation. A lender who has stood in a Carver County greenhouse in March, or watched grain move out of a bin in October, does not need the March number explained twice.
In 2026, readers of Twin Cities Business voted us the Gold Winner for Best Minnesota Business Bank on more than 11,000 votes, following the Best Business Bank honor in 2025. A reader vote is a signal rather than a promise, and we read it the way you should: as a lot of Minnesota business owners saying the relationship worked. The full list of our 2026 banking recognitions has the rest of it.
The first conversation is not an application. It is fifteen minutes about what the business does and when the money moves. Everything else follows from that. You can talk with a business lender or find your nearest branch location and hours.
Frequently asked questions about business lines of credit
Is a small business loan from a bank installment or revolving?
Either, depending on the product. A commercial term loan, an equipment loan, and a commercial mortgage are installment debt: the money funds once and is repaid on a set schedule until the balance is zero. A business line of credit is revolving: you draw against an approved limit, repay, and draw again. The two are reported differently on credit and financial statements, and they are built for different jobs.
What is the difference between a business line of credit and a term loan?
A term loan funds the full amount on day one and amortizes on a fixed schedule. A line of credit is an approved limit you draw against as needed, with interest owed only on the drawn balance and the limit refreshing as you repay. The practical test is what the money buys. Something that will still be there in five years fits a term loan. Something that turns back into cash inside your operating cycle fits a line.
What is a business debt stack?
The full set of what a business owes, and how each piece is structured relative to what it funded. A typical stack has an operating line for seasonal timing, equipment notes matched to the useful life of the machines, a mortgage on the building, and sometimes a seller note from an acquisition. The stack is healthy when each need sits on debt of the right length. It causes trouble when a long-term asset ends up on the line, or a short-term need gets termed out over years.
How does interest work on a business line of credit?
Interest typically accrues only on the outstanding balance, calculated on what is actually drawn rather than on the approved limit. If the limit is $250,000 and the balance is $40,000, interest is running on $40,000. Draw nothing and there is no interest accruing on the line. Terms vary by lender and by structure, so confirm how yours is written.
What can a business line of credit be used for?
Short-term working capital. Buying inventory ahead of a selling season, funding materials and labor on a job before it is billed, covering payroll while a receivable is outstanding, or acting on a bulk purchase or an opportunity that will not wait. The common thread is that the money converts back into cash within the operating cycle.
What should a business line of credit not be used for?
Operating losses, a permanent shortfall, or a long-lived asset such as a building or a piece of equipment. A gap closes when the receivable is collected. A loss does not. If the balance on the line never comes down over the course of a year, that is worth raising with your lender, because it usually means the structure needs adjusting rather than the limit needing raising.
Does a business line of credit have to be paid down each year?
Not necessarily to zero, but most business lines carry an annual review, and lenders do look at whether the balance rests at some point during the year. A line that comes down in the off season is doing what a line is meant to do. One that sits at the limit all year is usually a sign that some portion of the borrowing is permanent and belongs on a different rung of the stack.
How is a business line of credit secured?
Most commonly by the business assets the line is funding, which typically means accounts receivable and inventory. Depending on the size and shape of the request, other business collateral or real estate may be involved, and owners generally provide a personal guarantee. Some commercial lines also carry a borrowing base certificate, a periodic report of eligible receivables and inventory that keeps the available limit tied to the collateral actually there. What is required varies with the request, which is why the structure conversation happens before the paperwork.
How large a line of credit can a business get?
A line is sized to the working capital need rather than picked off a menu. The starting point is the operating cycle and the seasonal peak: how much cash the business has out at the widest point of the year, and for how long. A business with a large but brief spring gap can need a bigger line than one with steadier and larger annual revenue. Bring the month-by-month shape of the year and the number tends to size itself.
What is an operating line of credit?
Another name for the same product, used most often in agriculture and manufacturing. An operating line funds the inputs and labor of a production cycle and is repaid when the output is sold. On a farm that means seed, fertilizer and fuel in the spring, repaid out of the fall crop, which is the shape our Minnesota farm loans and ag lending team works in every year. The mechanics are the same as any other business line of credit.
What is the difference between a business line of credit and a business credit card?
Both revolve, and that is most of what they have in common. A card is built for small, frequent, dispersed purchases with expense controls and per-employee limits. A line of credit is built for larger working capital swings, is usually secured by business assets, is underwritten against the business's financial statements, and is reviewed with your lender annually. Many businesses use both, for different things.
Which local Minnesota banks offer small business lines of credit?
Most community banks offer one, and the differences that matter are not on the product sheet. Three questions sort it out. Where does the credit decision actually get made, because a local branch of a national bank is not the same thing as a local decision. Who will you be talking to in year three, when the business has changed and the line needs resizing. And has the lender seen an operation like yours before, because a banker who has walked a job site or a shop floor asks better questions than one working from a spreadsheet. Security Bank & Trust Co. lends across the western and northern Twin Cities metro and the farm and manufacturing communities west of it, and the credit is presented and decided here. Our locations and hours page has the full list, and you can reach a business lender directly.
Do I need to be an existing customer to talk to someone about a line of credit?
No. Most first conversations happen before there is any relationship at all, and plenty of them happen at the customer's place of business rather than at a branch. It is worth having the conversation early, before the season starts, because sizing a line is easier when you are looking forward at the year than when you are already in the middle of it.
