Introduction

Revolving short-term loans and term loans are two common ways businesses manage cash flow—but they solve different problems. Revolving credit (a business line of credit or short-term revolving loan) gives flexibility to borrow repeatedly up to a set limit. Term loans deliver a one-time lump sum repaid over months or years with scheduled payments. Choosing the right option affects interest costs, covenant risk, and how predictable your cash flow will be.

Background and context

  • Revolving credit grew from consumer credit-card models and has become mainstream for businesses that face seasonal or irregular cash needs. The Consumer Financial Protection Bureau outlines how credit products differ in fees and protections (see consumerfinance.gov).
  • Term loans are a long-standing financing tool for investments—equipment, acquisitions, or renovations. Small Business Administration guides explain common term-loan structures and eligibility for small businesses (see sba.gov).

How each product works

  • Revolving short-term loans

  • Structure: A lender sets a maximum credit limit. You draw funds up to that limit, repay principal (and interest), and can redraw as needed while the facility is open.

  • Use cases: Payroll gaps, seasonal inventory buys, bridge financing, smoothing receivables.

  • Pricing: Often variable-rate interest plus fees (maintenance or unused-commitment fees). Renewals are subject to lender review and may include covenant checks.

  • Term loans

  • Structure: You receive a fixed principal up front and repay with regular principal-and-interest payments or interest-only periods followed by amortization.

  • Use cases: Equipment purchases, business acquisition, major renovations—projects where predictable repayment aligns with projected returns.

  • Pricing: Can be fixed or variable rate; lenders price term loans on amortization, collateral, and creditworthiness.

Practical distinctions that affect cash flow

  • Flexibility vs predictability: Revolving loans offer on-demand access; term loans impose consistent payments that help budgeting.
  • Cost profile: Revolving lines may be cheaper for short draws but costlier if balances stay high due to variable interest and fees. Term loans often have lower long-term rates for the same principal because they’re amortized and collateralized.
  • Renewal and rollover risk: Revolving facilities can be reduced or cancelled at renewal, creating liquidity risk. Term loans lock financing for the agreed term.
  • Covenants and collateral: Both may require covenants; term loans more frequently involve fixed repayment schedules and collateral such as equipment or real estate.

Real-world examples (short)

  • Seasonal retailer: Uses a revolving line to buy inventory before holidays, repays from sales, then re-borrows the next season.
  • Restaurant owner: Uses a 5-year term loan to buy ovens and complete build-outs with predictable monthly payments aligned to revenue projections.

In my practice, I’ve seen clients combine both: a small manufacturer used a term loan to buy machinery and a revolving line for month-to-month raw-material purchases. That mix reduced long-term cost while keeping working capital fluid.

Eligibility and underwriting

Lenders evaluate credit score, time in business, annual revenue, debt-service coverage, and cash flow forecasts. The SBA offers programs that change underwriting terms for qualifying small businesses; consult sba.gov for program details. For consumer protections and product comparisons, the CFPB provides guidance on fees and disclosures (consumerfinance.gov).

When to choose which

  • Choose revolving credit when: cash needs are recurring, timing is uncertain, or you need short-term bridging. Good for businesses with variable revenue.
  • Choose term loans when: financing a discrete project, equipment, or expansion where fixed payments match expected returns and you want longer-term predictability.

Professional tips

  • Size conservatively: Borrow only what you need. Revolving lines tempt repeated draws that raise effective cost.
  • Compare APR and all fees: Look beyond headline rates to commitment fees, draw fees, prepayment penalties, and origination costs. The CFPB recommends comparing total cost of credit across offers.
  • Plan for renewals: Don’t rely solely on lenders renewing a revolving facility—have contingency cash or backup financing.
  • Consider blended structures: Use a term loan for capital expenditures and a revolving line for working capital to optimize cost and flexibility.

Common mistakes to avoid

  • Treating a revolving line as permanent capital—renewal risk can create desperate refinancing at higher rates.
  • Ignoring covenants that trigger default if revenue dips.
  • Comparing only monthly payments without factoring fees, amortization, or total interest paid over time.

Related resources on FinHelp

Frequently asked points (brief)

  • Which option is cheaper overall: It depends on draw length, fees, and rate structure—term loans generally cost less for long-term, large principal needs.
  • Can you convert a revolving balance to a term loan: Many lenders offer conversions or structured paydown plans—ask at origination.

Professional disclaimer

This article is educational and not individualized financial advice. For decisions that affect taxes, legal risk, or large financial commitments, consult a licensed financial advisor, CPA, or your lender for personalized analysis.

Authoritative sources