Quick answer

Short-term working capital and a business line of credit both bridge cash-flow gaps, but they serve different patterns of need. Use short-term working capital (cash, receivables, or a term loan) when you have a predictable, one-off funding need. Use a line of credit when cash needs are recurring, seasonal, or unpredictable and you want on-demand access to funds.

How each option works

  • Short-term working capital: the liquid resources (cash, AR, inventory) a business draws on to pay near-term bills. If internal liquidity isn’t enough, businesses often take a short-term term loan or invoice financing to create working capital.
  • Line of credit (LOC): a lender approves a maximum borrowing limit you can draw from, repay, and redraw during the term. Interest is charged only on the amount used; fees and renewal terms vary by lender.

In my practice I’ve seen retailers use short-term loans to fund a single large inventory purchase, while service firms used an LOC to smooth payroll through seasonal lulls.

When to choose one over the other

  • Choose short-term working capital (or a short-term loan) when:
  • You need a defined lump sum for a known expense (inventory, equipment repair, a one-time contract).
  • You prefer predictable monthly payments and a set payoff timeline.
  • Choose a line of credit when:
  • Cash needs are irregular or seasonal (payroll swings, uneven receivables).
  • You value flexibility to borrow, repay, and borrow again without reapplying.

Costs, terms, and common trade-offs

  • Interest and fees: LOCs often charge variable interest (prime-based or flat APRs) plus maintenance or non-use fees; short-term loans usually have fixed repayment schedules and a set APR. Compare APR, origination fees, draw fees, and renewal costs.
  • Predictability vs flexibility: Term loans give predictability; LOCs give flexibility but require discipline to avoid chronic borrowing.
  • Qualification: lenders look at revenue, time in business, cash flow statements, business and owner credit scores, and may require a personal guarantee or collateral (SBA guidelines and lender rules vary) (see SBA guidance on loans) (cf. U.S. Small Business Administration).

Real-world examples

  • Manufacturing: a shop wins a large order and needs a lump sum to buy materials and pay overtime—best served by short-term working capital or a term loan.
  • E-commerce during holidays: volumes spike and working capital needs fluctuate—an LOC lets the business draw for fulfillment costs and repay after sales peak.

Common mistakes to avoid

  • Using an LOC for an expense you can predict and budget for—this can raise long-term borrowing costs.
  • Relying on working capital reserves without a contingency plan for multi-month shortfalls.
  • Ignoring fees and renewal terms on LOCs; some lenders charge unused-line fees or require annual renewals.

Quick checklist to choose the right product

  1. Estimate the size and timing of your cash need.
  2. Determine if the need repeats or is one-time.
  3. Compare total cost (APR + fees + renewal costs).
  4. Check qualification requirements: revenue, time in business, credit.
  5. Consider simpler options first—cash reserves, supplier terms, or short-term loans—before adding a revolving credit commitment.

How to apply and position your business

  • Prepare 6–12 months of bank statements, profit & loss statements, and accounts receivable aging.
  • Show consistent revenue or a contract that supports repayment.
  • Ask lenders about covenants, personal guarantees, and what triggers renewal or draw limits.
  • For SBA-backed options or longer-term guidance, review SBA loan resources (sba.gov).

For practical reading on using credit lines for short-term needs, see FinHelp’s article “Using a Line of Credit for Short-Term Capital Needs: When It Works” (https://finhelp.io/glossary/using-a-line-of-credit-for-short-term-capital-needs-when-it-works/). For help qualifying and managing a small-business LOC, read “Small Business Line of Credit: When to Use It and How to Qualify” (https://finhelp.io/glossary/small-business-line-of-credit-when-to-use-it-and-how-to-qualify/). If you’re weighing an LOC against cash reserves, this FinHelp piece is directly relevant: “Emergency Funds: Using a Line of Credit vs. Cash Reserves” (https://finhelp.io/glossary/emergency-funds-using-a-line-of-credit-vs-cash-reserves/).

Professional takeaway

A line of credit is a better fit when you need flexible, repeatable access to funds; short-term working capital (or a short-term loan) is better for predictable, one-time funding. In my 15 years advising small businesses, the right choice depends on predictability of cash needs, cost comparison, and management discipline.

Professional disclaimer: This article is educational and not individualized financial advice. Consult a qualified lender or financial advisor to match financing to your unique business situation.

Sources: Consumer Financial Protection Bureau guidance on credit products (consumerfinance.gov), U.S. Small Business Administration loan resources (sba.gov).