Working Capital Loan vs Line of Credit
One funds a single use at a fixed monthly payment. The other lets you draw against availability as needs come up. The right answer depends on the shape of the cash gap.
A working capital loan and a line of credit are both general-purpose answers to a working-capital gap, but they have very different shapes. A working capital loan is a single lump sum that lands in your account on day one and amortizes back over a fixed term, typically 6–24 months, on a fixed monthly payment. You take it, you use it, you pay it back. A line of credit is a pool of approved capital that sits there available; you draw against it as needs come up, you only pay interest on what is currently outstanding, and as you pay it down the availability refills — what Mike calls "water in a cup." The short decision: if you have one clear use of funds with a clear payback (a contract about to close, a six-month inventory build, a known seasonal spike), a working capital loan is simpler and cheaper than carrying an unused line. If your cash needs are episodic — payroll some weeks, vendor payments other weeks, an unpredictable rhythm of working-capital gaps — a line of credit costs less in aggregate because you are not paying interest on dollars you are not currently using. Lines of credit also come in two flavors that matter for this comparison. A traditional bank or non-bank revolver sits there indefinitely and gets renewed annually. A revenue-based revolving line is the fast-funding cousin — typically a non-bank product, available in 2–4 weeks, priced higher than a bank line but lower than a working capital loan if you actually use it lightly.
Working Capital Loan vs Revolving Line of Credit at a glance
| Feature | Working Capital Loan | Revolving Line of Credit |
|---|---|---|
| Speed | 2–10 business days | 2–4 weeks for non-bank revolving; 4–8 weeks for bank LOC |
| Cost | 1.25%–4% per month (18%–48% APR equivalent) | Prime + 2–8% on drawn balance (varies by lender type) |
| Range | $100K – $10M+ | $100K – $25M+ |
| Collateral | None — revenue-based | Varies — revenue-based, AR-backed, or blanket UCC depending on structure |
| Structure | One-time lump sum, monthly amortization | Revolving pool — draw, pay down, redraw |
| Interest you pay | On the full original balance for the life of the term | Only on the currently drawn balance |
| Speed to first dollar | 2–10 business days | 2–4 weeks (non-bank revolver) or 4–8 weeks (bank LOC) |
| Pricing (as of 2026) | 1.25%–4% per month on the original balance | Prime + 2–8% per year on drawn balance |
| Typical term | 6–24 months, fully amortizing | 12 months renewable, often multi-year |
| Best for | One known use of funds with a clear payback timeline | Recurring, episodic, or unpredictable working-capital needs |
| Carrying cost when unused | N/A — you got the lump sum on day one | Sometimes a small unused-line fee; usually zero |
| Underwriting | Bank statements, revenue trend | Bank statements + revenue (RBF revolver) or AR/assets (ABL revolver) |
When to pick Working Capital Loan
A lump-sum term loan with a fixed monthly payment. Fast, simple, structured for a specific use of funds with a clear payback.
Pick a working capital loan when you can name the use of funds in one sentence and the payback timeline in another. A contract just closed and you need $400K to fund delivery. A specific inventory build needs $250K over four months and recovers as sales come in. Payroll needs to be covered for two months while a slow-paying customer catches up. In all of these cases, the math is clean: take a lump sum, deploy it, pay it back on a monthly schedule that fits the recovery curve of the use of funds. The simplicity is the product. The other reason to pick a working capital loan is speed. A line of credit — even a fast revenue-based revolver — typically takes 2–4 weeks to set up. A working capital loan can be funded in 2–10 business days. If the use of funds has a deadline (a vendor needs to be paid Friday, a contract needs material ordered next week), the lump-sum product is the only realistic option. The trade-off is that you pay interest on the full balance from day one — there is no concept of "I only need half of it for the first month." You took the whole thing; you pay on the whole thing.
- •You can name the use of funds and the payback timeline in one sentence each
- •You need the money in days, not weeks
- •The recovery curve of the use of funds matches a 6–24 month amortization
- •You want a fixed monthly payment with no draw discipline required
- •You do not need ongoing availability after the use of funds is done
When to pick Revolving Line of Credit
A pool of approved capital you draw against as needed. Pay interest only on what is outstanding; redraw as the line refills.
Pick a line of credit when your cash-flow shape is episodic rather than event-driven. Payroll Fridays where deposits run a little behind. Vendor payment days where you front the cash before customer payments land. A seasonal business that ramps inventory in Q3 and unwinds it in Q4. In these cases, you are not solving a single problem — you are smoothing a recurring rhythm — and the right tool is a pool of capital you can draw against as needs come up, only paying interest on what is currently out. The key discipline of a line of credit is that you have to actually pay it down when you have cash. The water-in-a-cup mechanic only works if you keep refilling the cup. Borrowers who treat a line as a permanent draw end up paying full-balance interest indefinitely and lose the entire structural advantage. The product rewards borrowers who use it the way it was designed: in and out. For businesses with strong AR, an AR-backed revolver (factoring or ABL) is typically the cheapest version of this product. For businesses without strong AR — services firms, SaaS, recurring-revenue businesses — a revenue-based revolving line is the non-bank alternative, sized at roughly 10–15% of annual revenue, priced higher than a bank line but available in 2–4 weeks.
- •Your working-capital gaps are episodic, not one-time
- •You have the discipline to pay the line down between draws
- •You want to only pay interest on what is currently outstanding
- •You can wait 2–8 weeks to set up the facility
- •You have AR, assets, or revenue history to underwrite a real revolver
A worked example
Scenario: A $2.8MM HVAC contractor has seasonal payroll spikes — three months a year where weekly payroll runs roughly $80K higher than non-peak season. Total seasonal need is about $240K above the trough, but the contractor only needs all of it for about six weeks.
How the math works out: Working capital loan path: $300K lump sum at 1.75% per month (interest on declining balance, 12-month amortization) ≈ $28,000 per month in P&I, total interest cost ~$42K. Even though peak need is six weeks, the loan terms force the cash out of the business in fixed monthly payments for the full year. Line of credit path: $300K revolver at Prime + 5% (assume 13% APR in 2026). Interest accrues only on the outstanding balance: about $3,250 per month while fully drawn, zero when paid down. If average utilization is roughly $90K over the year (six weeks fully drawn, the rest at zero), annual interest cost is around $11,700. The comparison holds because the LOC lets the contractor pay down between peaks. If utilization were continuous, the LOC at ~13% APR would still beat the loan at ~23% APR effective — just by a narrower margin.
Takeaway: For an episodic cash-flow shape, the line of credit ends up costing roughly a quarter of the lump-sum loan — not because the rate is dramatically better, but because the line stops charging interest the moment the cash isn't needed. Flip the scenario to a single $300K equipment purchase with a 12-month payback and the lump-sum loan is the better structural fit: at continuous utilization, the rate advantage of the line narrows, and the predictability of fixed monthly payments matters more.
How Michael thinks about it
“the lender sets up what's called a lockbox. It's like a different bank account that the payments will go to that account. So you would inform your customers, look, starting on January the 23rd or whenever…please remit payments over here to this Bank of America account… So it's not like you're making payments to the line. The payments come right into them and it immediately pays down… more availability is, the availability rises for you. It's almost like water in a cup, you know.”
— Michael Kodinsky, Founder of Serve Funding · Mike's water-in-a-cup analogy for how a revolving line actually works — applies whether the line is factoring, ABL, or a revenue-based revolver.
“there's a great lender that we have that does a revolving line and go up to 350k, which is usually one of my gripes about them that I wish they did a bigger… their rate is actually lower, like their true APR rate is like in the mid teens. So it's actually even lower than 2% a month.”
— Michael Kodinsky, Founder of Serve Funding · Mike on the Daryl Wakefield call, on the non-bank revenue-based revolver — fast to set up, priced between a bank line and a working capital loan, sized to about 10–15% of annual revenue.
“In that case, we'd be looking at more of like a revenue-based – in other words, underwritten cash flows, not tied to a specific asset such as AR, but like a revenue-based revolving line. We have a great lender that will probably qualify you, maybe $100,000 to $150,000, they're generally going to go kind of 10% to 15%, maybe pushing 20%, but more like 10% to 15% of annual revenues.”
— Michael Kodinsky, Founder of Serve Funding · Mike on the Schuyler Rooke call, explaining how a revenue-based revolver gets sized when there is no AR to anchor the underwriting.
Common questions
If a line of credit is cheaper, why would I ever take the lump-sum loan?
Speed and simplicity. A working capital loan funds in 2–10 business days; a line of credit typically takes 2–4 weeks (non-bank revolver) or 4–8 weeks (bank or ABL revolver). If the use of funds has a deadline, the lump-sum product is often the only option. The line also requires discipline: you only realize its cost advantage if you actually pay it down between draws. Borrowers who carry a full balance indefinitely lose the structural benefit of the revolver.
Can I have both?
Yes, and it is a common stack for businesses with both an event-driven need and a recurring rhythm. Take a working capital loan to fund the one-time event (a contract, an acquisition, a recapitalization) and keep a smaller line of credit available for the everyday smoothing. The two products serve different purposes and rarely conflict at the lender level — though if both are non-bank you will want to make sure no UCC priority issues create a problem.
How big a line of credit can I expect to qualify for?
It depends on the underwriting type. A revenue-based revolver typically sizes at 10%–15% of trailing annual revenue, sometimes up to 20%. An AR-backed revolver (factoring or ABL) sizes based on your eligible receivables, which can be far larger — 75%–95% of qualified AR. An equipment- or asset-backed revolver sizes off the liquidation value of the pledged collateral.
What happens if I draw the whole line and never pay it down?
You end up effectively paying for a term loan at line-of-credit pricing, which is usually fine but means you have lost the structural advantage of the revolver. Most lenders will flag a fully-drawn line that does not move and ask questions at renewal. If the use of funds turned into a permanent need, the honest conversation is to refinance the drawn balance into a term loan and reset the line for episodic use.
Does the line of credit show up on my balance sheet?
Yes, the drawn balance appears as debt. The undrawn portion is generally a disclosure rather than a liability on the face of the statements. This is different from factoring, which is structured as a sale and does not appear as debt at all; if balance-sheet treatment matters to you, factor that into the choice between products.
Can I prepay a working capital loan early without penalty?
Most reputable non-bank working-capital lenders allow prepayment without penalty, and a meaningful subset offer interest forgiveness on prepay — meaning if you pay off the loan early you get a discount on the remaining interest charges. Always confirm prepay terms in writing before signing. If a lender will not put the prepay terms in writing, that is a sign you are not dealing with the right lender.
Is a credit-card line the same as a business line of credit?
No. A business credit card is unsecured personal-credit-driven revolving capital at consumer-style rates (often 20%+ APR), with credit limits typically capped at $50K–$100K. A real business line of credit is underwritten to the business — revenue, AR, or assets — sized in the hundreds of thousands to tens of millions, and priced in the Prime + 2–8% range. For anything beyond minor expense smoothing, the business line of credit is the right tool.
