Business line of credit or term loan: match funding to cash flow

Start with when the cash moves

A business can make a sale before it gets paid. If inventory, materials, or other costs come due first, the useful financing question is when money leaves the business and when it returns. A recurring gap between those dates is different from a one-time purchase that will support the business for years.

Before comparing offers, sketch a cash calendar. Include expected customer payments, operating bills, existing debt payments, and the proposed new borrowing. Repeat the exercise with slower collections or lower sales. This is a planning exercise, not a prediction that financing will pay for itself.

How a revolving line differs from a term loan

A revolving business line of credit lets a borrower draw funds as needed within the agreement's limits, repay, and borrow again while the facility remains available. A term loan provides funding to repay over an agreed period rather than a reusable credit limit.

In its notice introducing the Working Capital Pilot, the Small Business Administration explains the interest difference: a lump-sum working-capital term loan starts accruing interest on the amount disbursed, while a revolving line charges interest on money borrowed for the time it is used. That does not mean an unused line has no costs. Fees and other obligations depend on the agreement.

SBA says most 7(a) term loans have monthly principal-and-interest payments from business cash flow. Fixed-rate payments stay the same; a lender may change the payment on a variable-rate loan when the interest rate changes. Do not assume a line uses the same payment schedule. Ask for the actual draw, repayment, and maturity terms.

Match the structure to the spending

For a seasonal inventory cycle, a revolving line may be worth comparing because purchases and customer receipts happen at different times. SBA describes its Seasonal CAPLine as financing seasonal increases in receivables and inventory. Its Working CAPLine supports recurring or short-term needs, with repayment tied to converting short-term assets into cash.

For a defined equipment purchase, compare a term loan's repayment period with the time the equipment is expected to help produce cash. FDIC's commercial-lending examination guidance identifies a loan term that does not fit the useful life of collateral, and operating cash flow that cannot cover debt repayment, as warning signs. A smaller payment alone does not show that an offer fits the business.

These are comparison starting points, not rules that one product always wins. SBA's 7(a) program can finance both working capital and machinery. The exact loan structure, eligibility, security, and repayment plan still matter.

Compare costs and access together

Request written terms for the same funding need. Compare the money you expect to use, not just the largest advertised limit. SBA notes that Working CAPLines require ongoing collateral monitoring and may carry additional lender fees. Its Working Capital Pilot also has a time-based guaranty fee structure. Interest is only one part of the comparison.

• What interest rate applies, and can it change?
• Which setup, draw, renewal, monitoring, or other fees apply to this offer?
• When are principal and interest due, and what balance is due at maturity?
• Can repaid money be drawn again, and what conditions limit access?
• Is the available amount tied to eligible inventory or unpaid customer invoices?
• What collateral and personal guarantees are required?
• What happens at renewal, after late payments, or if required financial reports are missing?
• What does early repayment cost, if anything?

A credit limit is not a cash-flow fix

SBA's Working Capital Pilot requires timely, accurate financial statements, receivables and payables aging reports, and inventory reports. Lenders must also obtain updated financial statements annually and review credit as part of renewal. These requirements illustrate why ongoing access to credit can come with ongoing reporting work.

If the forecast never shows enough cash to repay borrowing without another draw, pause and examine the operating problem before treating a larger limit as the answer. Have the lender explain unclear terms, and consider an accountant or qualified adviser for a business-specific review. SBA-backed financing still requires creditworthiness and a reasonable ability to repay; a government guaranty does not promise approval.