The test is whether the need repeats
A one time need such as covering a delayed insurance settlement is a working capital situation. A recurring need such as a slow first quarter every year, or a deposit gap on every catering contract, is a line of credit situation.
Paying interest on capital you are not currently using is the main cost of choosing wrong.
How each is priced
Working capital carries a fixed total cost known at signing, repaid daily, weekly, or monthly across 3 to 18 months.
A line of credit charges interest only on the drawn balance. Undrawn capacity is often free, sometimes carrying a small maintenance fee.
Speed and access
Working capital funds fastest from a cold start, usually 1 to 3 business days.
A line takes slightly longer to open, 2 to 7 business days, and then draws land the next day for as long as the line stays open. The right time to open one is before it is needed.
Calculator
Working capital vs line of credit, in dollars
One number decides this: what each option costs across a year of the way you actually use the money. A lump sum charges its full cost whether the capital is working or sitting. A line charges only for the days a balance is out.
Fixed total cost, known at signing.
How long a balance typically stays out before you repay it.
Enter 0 if the line has none.
The line wins as long as the balance goes back down. If the balance never gets repaid, it prices like a term loan and the comparison changes.
The arithmetic
Working capital cost = (amount x factor) - amount. Line cost = balance x annual rate x days drawn / 365, multiplied by draws per year, plus any maintenance fee x 12.
Sources
- 1Interest on a revolving line accrues on the drawn balance, actual days over 365Office of the Comptroller of the Currency. Standard commercial lending accrual convention for revolving credit. Undrawn capacity accrues no interest, though some lines carry a separate maintenance or unused line fee.
- 2Factor rates are not interest rates and do not disclose an APRFederal Trade Commission. FTC guidance on merchant cash advance and small business financing marketing, on cost disclosure and the difference between a factor rate and a periodic interest rate.
- 3Bank prime loan rate, the base most business term financing is priced againstFederal Reserve, H.15 Selected Interest Rates. Published daily by the Federal Reserve. Enter the current prime rate when pricing a variable rate offer.
Estimates, not offers: Amounts, terms, and funding times are estimates based on programs commonly available in food service. Actual terms vary by program, lender underwriting, time in business, revenue, and credit profile. Nothing here is an offer of credit or a guarantee of approval.