Understand the difference
A term loan usually advances a specified amount with a repayment schedule. A revolving line permits draws and repayments within an agreed limit, subject to its conditions. The line can support repeated operating cycles; a term structure can match a longer-lived project with a defined budget.
How to make the comparison
Compare the business’s cash pattern. A machine expected to produce value for several years may call for a different repayment horizon from inventory that sells within a season. A business can use both products for separate needs if the combined payments, security, and lender conditions remain workable.
The details that can change your decision
Revolving does not mean permanent or unconditional access. A line can be reviewed, reduced, or tied to collateral eligibility. A term loan may contain a balloon balance or prepayment charge. Compare commitment fees, interest on actual draws, renewal risk, and the cost of keeping funds unused. A fully drawn line that never reduces deserves a review of whether it is financing a lasting requirement.
Follow two different cash cycles
A fictional wholesaler must pay $40,000 for seasonal stock, then expects to collect customer payments within ninety days. A revolving facility can potentially fund the gap and be repaid as those sales collect, provided the invoices, inventory and business meet its terms. The same wholesaler wants a $100,000 packing machine expected to serve the business for years. Tying up the entire operating line in the machine could leave no room to purchase the next season's stock.
That distinction does not automatically determine approval or the ideal product. The line may require renewal, a temporary reduction in drawings or a borrowing base. The term loan may need a deposit, guarantee or security over the machine. Map the operating and investment cash flows separately, then test the combined obligations. Two well-matched facilities can still be too much debt when customer payments slow.
Source: BDC: lines of credit
Compare cost at realistic utilization
For a simplified interest-only illustration, a $60,000 line with an average $20,000 drawn for a year at an assumed 10% rate produces $2,000 of interest before fees. Drawing the entire $60,000 for that year produces $6,000 at the same assumed rate. These are fictional constant-balance calculations, not lender quotes or an amortizing-loan comparison. The approved limit and the expected balance serve different purposes in the budget.
List arrangement, renewal, unused-limit and transaction charges wherever they apply. For the term option, use its actual amortization schedule rather than multiplying the opening principal by the rate for every year. Ask what happens at the end of each facility: is repayment required, does review occur, and is new borrowing subject to fresh approval? A permanent operating deficit will not disappear because a line can technically revolve. If the balance never falls after the selling cycle, investigate whether it supports accumulated losses or a longer-lived investment.
- Will receipts naturally repay this draw before the next cycle?
- What part of the line must remain available for ordinary operations?
- What renewal, demand, collateral or reporting conditions apply?
- What is total cost at the balance the business expects to use?
Source: SBA: 7(a) loans · BDC: working capital loans and revolving lines
Your next-step checklist
- One-time investment or recurring gap
- Repayment source and operating cycle
- Renewal versus maturity obligations
- Total costs at realistic usage levels
Crack this combination.
Which structure is commonly suited to repeated short-term cash gaps?
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Sources & further reading
This file draws on the following references. Product availability and requirements must be confirmed with the provider.
BDC: lines of creditSBA: 7(a) loansBDC: working capital loans and revolving lines