A wholesale distributor in Portland needed $100K. His accountant said get a term loan. His buddy said get a line of credit. He listened to the accountant, took a 5-year term loan, and locked in tens of thousands in total interest — on money he only actually needed for about 3 months out of each year. It's a mistake we see across wholesale distributor financing — picking the wrong product costs more than picking the wrong rate.
Note: All rate examples in this post are illustrative. Your actual rate depends on your credit, revenue, time in business, and lender. See what 70+ lenders will offer you in 60 seconds — no credit pull.
If he'd gotten a line of credit instead, he'd draw $100K, use it for 3 months, pay it back when his receivables hit. The interest cost for those 3 months would be a fraction of what a term loan charges over 5 years.
He overpaid by almost $15,000 because he picked the wrong product. And his accountant — who's great with tax returns — didn't understand business lending.
How Each One Works
Term loan: You borrow a lump sum. You start paying interest on the full amount from day one. Fixed monthly payments for 1-10 years. It's like a mortgage — predictable, structured, and you're paying whether you're using the money or not.
Line of credit: You get approved for a limit — say $100K. You draw what you need, when you need it. Pay interest only on what's outstanding. Repay it, and the credit is available again. It's like a credit card with much better rates.
That distinction matters more than you'd think.
Head-to-Head Comparison
| Feature | Line of Credit | Term Loan |
|---|---|---|
| How you receive funds | Draw as needed | Lump sum |
| Interest paid on | Only what you draw | Full amount from day 1 |
| Repayment | Revolving, flexible | Fixed monthly payments |
| Best for | Recurring cash gaps, seasonal needs, unpredictable expenses | One-time purchase, expansion, known cost |
| Typical rates | Varies by profile | Varies by profile |
| Terms | 6 months to 5+ years revolving | 1-10 years fixed |
| Speed to fund | 1-5 days | 1-7 days |
Notice something? Term loans often have lower rates. But lower rate doesn't mean lower cost. That's the trap.
Not sure which product fits your situation? Run the numbers with real rates and see for yourself.
Bottom line:
Lower rate isn't lower cost. The product that wins is the one whose payment shape matches how you'll actually use the money.
The Real Cost Comparison
Let's say you need access to $100K, but you only use it for 3 months out of each year. Here's what that looks like (example rates for illustration):
Line of credit at 15% APR (example):
- Draw $100K, use it for 3 months, repay
- Interest per year: ~$3,750
- Over 5 years: ~$18,750
Term loan at 12% APR over 5 years (example):
- $100K disbursed on day one, fixed monthly payments of ~$2,224
- Total interest over 5 years: ~$33,500
- Plus you're locked into payments even when you don't need the cash
That's a $14,750 difference in this example. The "cheaper" rate cost almost $15K more.
The math only works in favor of a term loan when you need the full amount for the full duration. Anything else, and you're paying interest on money sitting in your bank account doing nothing.
cost difference over five years when $100K is only needed three months a year
— Calculated: LOC interest at 3-month annual usage vs term loan amortization over 5 years on $100K principal
That gap doesn't come from a worse rate — the term loan in this comparison was actually the cheaper headline number. It comes from paying interest on idle principal for nine months out of every twelve, year after year. The shape of usage is what drives the cost.
If your draw pattern is genuinely lumpy — heavy in two or three months, near-zero the rest of the year — the math gets even more lopsided in favor of the line of credit, often by tens of thousands over a five-year horizon.
Plug your numbers into the same calculator I use with clients
See the real cost of a line of credit vs a term loan for your specific draw pattern.
See what 70+ lenders will offer your business.
See What You Qualify For →Here's What Most People Get Wrong
They get a term loan for a cash flow problem. That's like buying a house when you need a hotel room.
Cash flow problems are temporary by nature. You're short this month because a big client is late. You need to stock up on inventory before your busy season. Payroll is Friday and your receivable lands next Thursday.
These are revolving, recurring problems. A line of credit solves them precisely. A term loan solves them too — but it's overkill, and you'll pay for years of interest on a problem that lasted weeks.
Match the product to the need:
- Recurring cash gaps → Line of credit
- Seasonal fluctuations → Line of credit
- Buying equipment → Term loan or equipment financing
- Opening a second location → Term loan or SBA loan
- Unpredictable expenses → Line of credit
- One-time known cost → Term loan
Bottom line:
A term loan for a cash flow problem is a multi-year payment for a multi-week issue. Match the product's repayment shape to how the cash actually moves through your business.
The mismatch shows up most when the underlying need is recurring but feels like a one-time crunch in the moment. A late receivable or a slow month feels acute when you're inside it; over a year, those events form a pattern, and the right product is shaped around the pattern, not the worst week.
That's why the product question always comes before the rate question — picking the right repayment shape saves multiples of whatever rate-shopping would have produced on the wrong product.
Why Cash Flow Timing Drives the Product Choice
The right product isn't about rate — it's about whether your need is one-time and known (term loan) or recurring and variable (line of credit). Pick the wrong shape and you'll either be paying interest on idle money or running out of capital exactly when you need it.
When to Get Both
Here's what smart business owners do: they have a term loan for a specific purchase AND a line of credit for ongoing cash flow. These aren't competing products — they solve different problems.
A restaurant owner might have a $200K term loan for a kitchen renovation and a $50K line of credit for bridging the gap between slow Mondays and busy weekends. A contractor might finance a $120K excavator with a term loan and keep a $75K LOC open for materials and payroll timing.
You don't pick one. You build a capital stack. Business owners in Georgia and North Carolina tell us the same thing — once they understood the difference, they stopped overpaying. For larger credit facilities, commercial financing adds another layer of options beyond standard small business products.
Why a Capital Stack Beats a Single Product
Most operators use multiple products on purpose: a term loan funds the asset, a line of credit smooths the timing. Each product is cheap for what it's designed to do — combining them gives you predictable financing for the predictable, and flexibility for everything else.
The Portland distributor's outcome is the everyday version of this play. He had a term-loan-shaped solution forced onto a line-of-credit-shaped problem, and the difference compounded over five years until the cost was visible.
The closed file below shows the eventual swap into a revolving line plus the savings the product change produced — same business, same revenue, fundamentally different cost shape.
Portland, OR wholesale distributor
Business Line of Credit
$100K
Replaced a 5-year term loan plan with a revolving line drawn ~3 months a year against receivables — saved roughly $14,750 in interest over the period vs the term loan path.
See the full case →Bobby's Take
Every business should have a line of credit open before they need one. It's insurance for your cash flow. The worst time to apply is when you're desperate — that's when you get the worst terms, the lowest limits, or a flat decline.
Apply when business is good. Get approved. Let it sit at zero. Draw on it when you need it. Pay it back when your cash comes in. That's how the smart operators run their businesses.
And stop letting your accountant pick your lending products. They're great at what they do — but most accountants have never seen a term sheet. Talk to someone who connects businesses with lenders every single day.
FAQ
Can I have both a line of credit and a term loan at the same time?
Absolutely. Many business owners carry both. Lenders evaluate each product separately. Having a term loan doesn't disqualify you from a LOC, and vice versa.
Which one is faster to get?
They're similar. Lines of credit can fund in 1-3 days with alternative lenders. Term loans typically take 1-7 days. SBA-backed versions of either take 30-60 days.
What credit score do I need for a business line of credit?
Most alternative lenders want 600+ for a LOC. Banks and SBA lenders prefer 680+. Below 600, you may still qualify for working capital products with shorter terms.
Still not sure which product saves you money? Plug in your real numbers and compare costs side by side. It takes 30 seconds and the answer might surprise you.
