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By Travis Yule — CEO & Founder, Full Send Funding
Published 2023-06-05 · Updated 2026-09-30
A term loan charges interest on the whole amount from day one; an undrawn line costs almost nothing. That single fact decides most of the choice between them.
In one sentence: A line is priced on the balance you draw and a term loan on the amount you were given, so the choice turns on whether the need recurs — but at the same 12% a line held at its limit all year costs 1.81 times an amortising term loan, and the two cross at about 55% average utilisation.
A line of credit is a reusable limit you draw against as needs arise, paying only for what you actually use. A term loan is a single lump sum on a fixed repayment schedule. The two get confused constantly, and choosing the wrong one is expensive in a way that is invisible until you are six months in.
The decision is not about which is cheaper. It is about whether the need is recurring or one-time — and that question has a right answer for most businesses.
Two things make the comparison harder than it looks, and neither is usually explained to the person signing. The first is that "term loan" covers two entirely different ways of pricing money, and only one of them is comparable to a line at all. The second is that at the same stated rate, a line held at its limit for a year costs 1.81 times what an amortising term loan costs — because the term loan's balance falls every month and the line's does not. Both are arithmetic, and both are worked below with every input stated.
The distinction that matters most is the last row. With a term loan you begin paying interest on the entire amount the day it funds, whether or not you have spent it. With a line, an undrawn balance costs nothing beyond any maintenance fee — so a facility that sits at zero for four months costs almost nothing for four months.
That single fact is why an unpredictable need belongs on a line and a known expense belongs on a term loan, almost regardless of the headline rates.
Underneath that row is the thing you are actually buying. A term loan transfers money. A line transfers an option to borrow — capital a funder has agreed to hand over on a date it does not choose, in a condition it cannot yet see. Options are never free, so the price of the option is somewhere in the deal whether or not anybody names it: in a higher rate on drawn dollars, in a fee on the undrawn portion, in a tighter qualifying bar, or in the right to review the limit and cut it. If a line looks strictly better than a term loan on every line of a term sheet, the price of the option has been moved somewhere you have not read yet.
Before any comparison means anything, establish which of two pricing bases you have been offered, because they behave in opposite directions.
Accrual pricing runs with time, on the balance still owed. A bank term loan is priced this way and so is a line of credit: a rate applied to what is outstanding, for as long as it is outstanding. Pay the balance down and the cost falls with it. Pay it off and the cost stops. The meter is running, and you control how long.
Fixed-fee pricing sets the total at signing. Our own defined-term working capital facility works this way, as does every merchant cash advance: an amount funded multiplied by a factor gives a payback amount that does not move afterwards. A 1.20 factor on a four-month term is 20% cost of capital, and our published range is 4.5% to 45% depending on qualifications and term length. Repaying in month two does not refund month three unless the agreement contains a prepayment discount in writing. APR, factor rate and the math nobody shows you converts between the two bases and explains why paying a fixed-fee structure off early raises its annualised rate rather than lowering it.
Why this decides the comparison: a line is an accrual instrument by construction. There is no other way to price a balance that changes every week. So "line versus term loan" is a like-for-like comparison only when the term loan is also priced on accrual. Set a line against a fixed-fee term structure and you are not comparing two rates at all — you are comparing a meter to a ticket.
One line is built the other way, and it is ours. On the flex line Full Send Funding funds in house, each draw is its own advance, priced as an advance — a factor on the amount drawn, not interest — so a draw is a small ticket rather than a meter, and what the line adds is that you buy only the tickets you need, when you need them. The line this article's interest arithmetic describes, priced on the drawn balance by the day, is the kind we arrange with a direct lending partner, only if you choose to and at no fee to you, on terms the partner sets out in writing before anything is signed.
The dollars make the point faster than the theory. $100,000 at a 1.20 factor on a four-month term costs $20,000, fixed. $100,000 on a three-year amortising loan at 12% a year costs $19,571.52 in interest, across thirty-six payments of $3,321.43. Almost identical dollars — for nine times as long a hold. Per month that the money is actually in the business, the four-month structure runs $5,000 and the three-year loan runs $543.65. That is not an argument that one is bad: speed, reach and a short qualifying bar are what a fixed-fee structure sells, and it is the wrong shape for capital held for years.
Hold one rate constant — 12% a year on the drawn balance, the same illustrative figure the working capital product guide uses in its cost-by-horizon comparison — and one amount constant, $100,000. Nothing below changes except how the money is used, and the cost moves by more than a factor of three.
A distributor is short $100,000 for about thirty days, four times a year, because a large customer pays on net-60 and payroll does not. On a line at 12% a year, one thirty-day draw of $100,000 costs $100,000 × 0.12 × 30 ÷ 365 = $986.30. Four of them cost $3,945.21 across the year, and for the other eight months the facility costs nothing beyond whatever maintenance fee it carries.
Serve the same four gaps with a term structure and the money has to be out the whole time, because you cannot hand a term loan back between gaps. At the very floor of our published band — 4.5% on $100,000, or $4,500 — the fixed-fee structure already costs more than four line draws, and that floor is the cheapest price we publish. At a 1.20 factor, which is $20,000 on $100,000, it costs five times the line.
This is the case the line was invented for, and it is not close.
Now the same business draws the whole $100,000 and never repays it. Twelve months at 12% a year on a balance that never falls is $12,000 — the full rate on the full amount, every month of the year.
Compare an amortising term loan of $100,000 at the identical 12%, repaid in twelve monthly payments of $8,884.88. Total paid is $106,618.55, of which $6,618.55 is interest. The line costs 1.81 times as much at the same stated rate, and the only difference between them is the one that produced it: the term loan's balance falls every month and the line's does not.
That is the sentence to hold on to, because it is the exact opposite of what "you only pay for what you use" sounds like it is promising. You do only pay for what you use. If you use all of it all year, you pay for all of it all year.
One number decides which structure is cheaper at a given rate, and it is not the rate. It is your average drawn balance across the year.
At 12%, the amortising term loan above costs $6,618.55 in interest. A line at the same 12% matches that cost when its average drawn balance is $6,618.55 ÷ 0.12 = $55,154.55 — about 55% of a $100,000 limit. Run below that on average and the line is cheaper. Run above it and the term loan is.
Fees move the crossing. A maintenance fee of $1,000 a year has to be earned back before any saving begins, and at 12% every $1,000 is worth $8,333.33 of average balance, so the crossing drops from about $55,155 to about $46,821. Each fee on a line does the same thing: it lowers the utilisation at which the line stops being the cheaper structure. Run this with your own rate, your own fees, and an honest reading of your average balance over the last twelve months — not the next twelve, which is where optimism lives.
When we price a $100,000 advance we are pricing four months of bank statements we have already read. When we open a $100,000 line we are setting a limit against a condition we cannot yet see. A line is capacity the business asks for later, on a day it chooses, and each draw is reviewed when it is requested. That difference is the whole reason the two files are read differently, and applicants rarely hear it said out loud.
Draws cluster in bad weeks. The average dollar drawn on the average line is drawn when the business is weakest, because that is when money is short. A line is therefore not underwritten against the business as it looks today; it is underwritten against how it is likely to look on its worst week of the coming year. That is why a line file is read for cushion rather than for size — average daily balance rather than headline deposits, the low point rather than the average, negative days counted rather than explained away. What underwriting actually reads in four months of statements is the same evidence, weighted for a different question.
Utilisation is a signal before it is a balance. A facility that sits above 90% drawn for twelve consecutive months is not a line being used. It is a permanent capital need mispriced as a revolving one, and it reads that way from the outside long before anybody says so. The business experiences it as a working facility; the file shows a balance that has never been repaid. That gap is what makes reviews go badly, and nothing about it depends on whether payments were made on time.
The review is a real event. A line review is not a funding renewal, where a position is partly repaid and rolled into a better agreement. A review can end with the limit cut and nothing new offered, and because reviews are triggered by deteriorating conditions, the cut lands in the month you were counting on the availability. Ask what triggers one, what would reduce the limit, and how much notice you get.
If anything you have already signed carries a working capital or current-ratio covenant, the two structures move it in opposite directions — and that alone can decide the product.
Drawing $100,000 on a line raises cash by $100,000 and raises current liabilities by $100,000, because a revolving balance is owed inside twelve months. Working capital does not move at all, and a current ratio above 1.0 falls toward it, because both sides of the fraction grew by the same amount.
A three-year term loan of $100,000 raises cash by the same $100,000, but only the principal scheduled for repayment inside twelve months is a current liability. On a thirty-six month schedule at 12%, that first year retires $29,441.56 of principal, leaving $70,558.44 long-term — so working capital rises by $70,558.44 on the day it funds, even though the business now owes more in total. The same cash, borrowed two ways, produces two different balance sheets.
None of this makes the term loan cheaper. It makes it compliant, which is a different and occasionally decisive property. The four covenant tests worked on one balance sheet shows how far apart those tests can land on identical numbers, and the working capital definitions article works the line-draw case through in detail.
A line of credit fits a need that recurs and cannot be timed: covering payroll across a gap between customer payments, buying inventory when a supplier offers a deal, funding materials for a job that pays in sixty days, or holding standby capacity for the emergency you cannot schedule. The pattern is draw, repay, draw again — and a line is the only structure that rewards repaying quickly, because the limit refreshes.
A term loan fits a single, known, one-time expense with a payback period you can forecast: a build-out, a vehicle, an acquisition, a hire whose contribution is measurable from month four. Fixed amount, fixed schedule, budgetable. It also fits the case people forget: a genuinely recurring need in a business that cannot qualify for a line, which is commoner than comparison articles admit, because the line is the harder product to get.
A third product fits when the money is already owed to you by a creditworthy customer rather than needed against general revenue. An accounts-receivable line or invoice factoring is sized against the invoices themselves, and factoring is underwritten on your customers' credit more than on yours, which is why it reaches businesses a line will not. Factoring versus a receivables line works the arithmetic on a $500,000 book.
Neither fits a structural loss. If a normal month spends more than it earns, both add an obligation to a business that already cannot cover its costs, and the shortfall grows by exactly the new debt service. That deserves its own diagnosis before any application — when borrowing is the wrong answer.
The right limit covers the largest gap you actually have to bridge, plus a margin. That is a different number from the largest limit you can qualify for, and the second one is on offer far more often than the first.
Size it from the cycle, not from ambition. A business whose receivables run 45 days, whose inventory turns in 30 and whose payables are paid at 30 has a cash conversion cycle of 45 days — 30 + 45 − 30 — and the limit has to carry 45 days of cash out before any comes back in. The cash conversion cycle article derives each component and converts days into dollars, and the working capital requirement calculator runs it on your own figures.
Two disciplines follow. Size to the trough of the cycle, not to the peak of a good month. And treat every dollar of limit above what the cycle justifies as an expense you will eventually incur: an unused $200,000 limit on a business whose cycle needs $75,000 is not a safety net, it is $125,000 of temptation with a fee attached. How much a business can actually borrow covers the same discipline on the funding side, where sizing runs 80% to 150% of average monthly revenue.
Taking a term loan for a recurring need. The classic error. The money funds one cycle of a problem that arrives four times a year, interest runs on the whole amount from day one, and by the third recurrence there are three obligations running concurrently. Watch the debit build. Three $50,000 advances at a 1.20 factor each owe $60,000 back; on a four-month term, which is about seventeen weeks, each carries a weekly remittance of roughly $3,529.41. All three running at once takes $10,588.24 out of the account every week. Against a business depositing $100,000 a month — $23,076.92 a week — that is 45.9% of every week's deposits leaving before payroll, rent or a supplier is paid — and the stacking article reaches roughly the same share at FOUR positions on a smaller book, which is the point: the share is a function of how much the debits total against what arrives, not of how many agreements produced them. Nothing about the underlying need changed. Only the number of positions did. That is stacking arrived at politely, and the stacking trap works by exactly the same mechanism.
Treating a line as revenue. A line drawn to its limit and never repaid is a term loan with a worse rate and no amortisation schedule, and the section above puts a number on "worse": 1.81 times the interest, at the same rate. The discipline is that a revolving facility should actually revolve. A line that has not touched zero in a year is financing something structural rather than something cyclical, and that is worth naming before the reviewer names it for you.
Sizing on the peak instead of the cycle. The section above gives the number; what working capital actually measures is the piece most businesses have never run.
Ranking the two on their quoted rates. A rate on a drawn balance and a cost of capital on an amount funded are not the same kind of number, and putting them side by side ranks nothing. Convert both into total dollars over the period you will realistically hold the money, then compare those. The factor rate converter does one half of that in both the forms the industry quotes; the other half is the accrual arithmetic worked above.
Lines are usually priced on the drawn balance, sometimes with a maintenance or non-use fee on the undrawn portion. A draw repaid in three weeks costs three weeks of carry. This is why a line can look more expensive on a rate sheet and be considerably cheaper in practice for a business with a genuine draw-and-repay pattern — and considerably more expensive for one that draws to the limit and stays there.
The comparison worth making is not rate against rate. It is total dollars of financing cost over a year, under how you will realistically use it. Four questions change that total more than the rate does, and all four are answerable in writing before you sign:
Our flex line has no maintenance or non-use fee on the limit; each draw carries its financing cost and the disclosed origination fee set out in the agreement, the only two charges on any offer of ours. Because each draw is its own advance, priced as an advance, there are no days of interest to count. The limit refills as it is repaid, as each payment clears. Draws can be requested while the account is in good standing — there is no fixed draw period — and the smallest draw is $5,000. Each draw is reviewed when it is requested, like a new advance: a decision within 24 business hours of the request and funding within 24 hours of approval. An interest line we arrange with a direct lending partner carries the partner's own rate and fees, set out in writing before anything is signed. Wherever you apply, get them in writing — that is where lines differ most between providers, far more than they differ on rate.
Our line of credit is a flex line of $10,000 to $2 million, each draw priced as its own advance; our fixed-fee term structures, which are advances rather than loans, run $5,000 to $10 million, with terms from four months to three years. Both start at 4+ months in business and $10,000 a month in revenue, and both are read from four months of business bank statements. We use a soft credit pull only. No collateral is required on anything we fund in house. A term loan or an interest-bearing line we arrange with a direct lending partner, only after talking through the options with you and only if you choose to, never through a broker, and at no fee to you; the same floor applies to the application, and the partner's terms are set out in writing before anything is signed.
Whichever of our own structures you end up with, on deals up to $2 million Full Send Funding files no UCC-1 lien against the businesses it funds and puts no confession of judgment in its agreements. That is worth checking on any other facility, a partner's included, because a secured revolving facility is normally backed by a UCC-1 financing statement filed against the business. What such a filing actually reaches — and what it does to your next facility — is worth reading before you sign one.
Lines are generally underwritten a little more conservatively, because the limit is set for draws that come later rather than for a single disbursement — so consistency of deposits and average daily balance carry more weight than they do on a one-time advance. The full picture of what is being read is the same set of signals, weighted differently. Offer size on either of our structures runs 80% to 150% of average monthly revenue. The timeline is the same for both of ours: a decision within 24 business hours and, on deals up to $2 million, funding within 24 hours of approval, 1–3 business days end to end.
Yes, and for many businesses it is the correct structure: a term facility for the asset, a line for the cycle around it. What matters is that combined debt service fits comfortably under real cash flow — which is exactly what underwriting checks, and exactly what a second obligation taken to service the first destroys.
Make it a weekly number, because that is the frequency the account actually feels. A $50,000 term structure at a 1.20 factor owes $60,000 back over about seventeen weeks, which is $3,529.41 a week. A line carrying $50,000 at 12% a year costs $6,000 of interest a year, or $115.38 a week, before any principal you choose to repay. Together that is $3,644.79 leaving every week against $23,076.92 of weekly deposits on $100,000 a month — 15.8% of receipts, before the principal on the line. That share is what underwriting reads, and a combined share the deposits cannot carry is the most common reason a file is declined — judged against the rest of the file rather than a published cut-off. Compute it for yourself before asking anyone to fund the second facility, and if the first structure alone already takes a heavy share, the answer is that the second facility is the wrong question.
Apply once and let underwriting price both. If a line is the better fit we will say so, and if the honest answer is that the need is neither, we would rather say that in an underwriting call. Compare every structure side by side first if you would rather see the shape of the market before applying.
Three things, and none of them are knowable from a page.
Which structure your file will actually be offered. Structure and size come out of four months of statements — deposit consistency, average daily balance, what is already being debited — not out of a preference stated on an application. A business that wants a line but shows a balance that has never risen above a week of payroll will be offered a term structure, and the reason is in the statements.
What your line will cost. On our flex line the pricing is set once, when the line opens, and each draw is its own advance at that pricing, carrying the disclosed origination fee set out in the agreement; an interest line's rate and fees are the partner's, set out in writing. Pricing is set per deal either way. Every number in this article is either our published range or an illustration built from inputs stated in the same sentence, so that you can re-run it with your own. None of them is a quote.
Whether the need is real. The one diagnosis that matters more than the product choice is whether the shortfall is a timing gap or a structural loss, and four months of bank statements answer that more honestly than any forecast does. If the answer is structural, neither instrument helps, and the case for not borrowing at all is the thing to read instead of this.
If you would rather work it through with a person than with a page: 518-312-0382, or travis@fullsendfunding.com.
A line is priced on what you draw; a term loan is priced on what you were given. If the need recurs and cannot be timed, take the line. If it is one known expense with a forecastable payback, take the term loan. Before you compare them, find out whether the term offer is priced on accrual or on a fixed fee, because only the first is the same kind of number as a line's rate. Then compute your honest average utilisation: below roughly 55% of the limit the line wins at an equal rate, above it the term loan does, and every fee on the line moves that crossing down. And if the line has not touched zero in a year, the product was never the problem — the need was structural, and it is cheaper to say so now than at the review.
The comparison table sets the two structures against each other as each generally works, stated directionally; its last row says what the firm funds in house — a flex line of $10,000 to $2 million and fixed-fee term structures of $5,000 to $10 million — and what it arranges with a direct lending partner. The rates in the text are stated illustrations, not quotes: 12% a year on a drawn balance is the same figure the product guide uses in its cost-by-horizon comparison, on the same 365-day basis, and a 1.20 factor on a four-month term is 20% cost of capital inside the published 4.5% to 45% band. Every dollar figure below them is derived from inputs stated in the same sentence rather than quoted. The sizing advice, covering the trough of the cycle plus a margin, is the firm's advice on what limit to ask for; the flex line's limit itself is sized the same way as an advance, at 80% to 150% of monthly revenue.
A line of credit is a reusable limit you draw against as needs arise, paying only on what you have actually drawn, with capacity refreshing as you repay. A term loan is a single lump sum repaid on a fixed schedule, with interest running on the whole amount from the day it funds. The practical difference is that an undrawn line costs almost nothing while an unspent term loan costs full interest.
It depends entirely on how you use it. Lines are usually priced on the drawn balance, sometimes with a fee on the undrawn portion, so a draw repaid in three weeks costs three weeks of carry. For a business with a genuine draw-and-repay pattern that is often much cheaper in practice even at a higher headline rate — and considerably more expensive for a business that draws to the limit and stays there. Compare total dollars of financing cost over a year under realistic use, not rate against rate.
When the need recurs and cannot be timed: covering payroll across a gap between customer payments, buying inventory when a supplier offers a deal, funding materials for a job that pays in sixty days, or holding standby capacity for an emergency. The pattern is draw, repay, draw again — and a line is the only structure that rewards repaying quickly.
When the need is a single known expense with a forecastable payback, where a term loan is cheaper to service and simpler to budget around. When the business would treat the limit as revenue — a facility drawn to its ceiling and never repaid is a term loan with a worse rate and no amortisation schedule. And when the shortfall is structural rather than cyclical: a line that has not touched zero in a year is financing something that revolving credit was not built to finance, and naming that is more useful than renewing it.
Our flex line runs from $10,000 to $2 million, sized the same way as an advance, at 80%–150% of monthly revenue, with each draw priced as its own advance; an interest-bearing line we arrange with a direct lending partner is sized by the partner. The right limit to ask for is not the largest you can qualify for — it covers the trough of your cash conversion cycle plus a margin. Sizing on the peak leads to a facility that is expensive to maintain and tempting to treat as revenue.
Taking a term loan for a recurring need. The money funds one cycle of a problem that returns four times a year, interest runs on the whole amount from day one, and by the third recurrence there are three loans running concurrently — which is stacking arrived at politely. The mirror-image mistake is treating a line as revenue: a facility that has not touched zero in a year is financing something structural.
Yes. Lines are typically reviewed periodically and the limit can be reduced or withdrawn — often precisely when business conditions have deteriorated, which is when you most need it. Ask at the outset what triggers a review, what would reduce the limit, and how much notice you would receive. It is a fair question and the answer tells you how much of a safety net the facility really is.
Yes, and for many businesses it is the correct structure: a term facility for the asset, a line for the cycle around it. What matters is that combined debt service fits comfortably under real cash flow, which is exactly what underwriting checks. What fails is a second obligation taken in order to service the first.
It can, and most people are surprised by how much. At 12% a year, $100,000 drawn on a line and held for twelve months costs $12,000, because the balance never falls. The same $100,000 on an amortising term loan at 12%, repaid in twelve payments of $8,884.88, costs $6,618.55 in interest — the line costs 1.81 times as much at an identical rate. The two match when the line's average drawn balance is about $55,155, roughly 55% of a $100,000 limit. Below that the line is cheaper; above it the term loan is.
No, and comparing them directly ranks nothing. A line's rate accrues with time on the balance still owed, so paying it down lowers the cost. Cost of capital on a fixed-fee facility is a total set at signing — amount funded multiplied by a factor — which does not shrink if you repay early, absent a written prepayment discount. Convert both into total dollars over the period you will actually hold the money, then compare those figures.
Because a line's limit is set before the money is asked for. A committed revolving facility obliges the lender to fund money it has not lent yet, on a day it does not choose; on our flex line each draw is reviewed when it is requested, like a new advance, but the limit is still set in advance. A term facility is priced against statements already on the desk; a line is priced against how the business will look on its worst week of the coming year, since draws cluster when cash is short. That pushes the weight onto cushion rather than size — average daily balance, deposit consistency, negative days — rather than onto headline revenue.
No. A draw raises cash and raises current liabilities by the same amount, because a revolving balance is owed inside twelve months, so working capital is unchanged and a current ratio above 1.0 falls toward it. A term loan behaves differently: on a three-year $100,000 loan at 12%, only the $29,441.56 of principal scheduled inside twelve months is current, so working capital rises by $70,558.44 the day it funds. If you carry a working capital covenant, that difference can decide the product.
Four things, all answerable in writing. Is the fee charged on the limit or on the drawn balance? Is there a minimum draw or a minimum number of days of interest per draw? When does repaid capacity become available again — immediately, or after the payment clears? And does the agreement require the balance to reach zero for a stated stretch each year? Those four change the annual cost more than the rate does, and the last one sets a deadline most borrowers never budget for.
Travis Yule worked in business funding before starting Full Send Funding in 2021, and has more than five years in business funding in all. He leads the company from Middle Grove, New York, and writes about working capital from the underwriting side of the table — what the numbers actually have to say before a business gets funded.