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Working Capital, Term Loan, Line of Credit, or Equipment Finance?
Four structures, four different jobs. How to tell which one fits what you are funding — and what it costs you to choose wrong.
The short answer
Match the structure to the life of what you are funding. Revenue-based working capital suits short, self-liquidating needs like inventory or a job's materials. A term loan suits a defined multi-year investment. A line of credit suits recurring, unpredictable gaps. Equipment finance suits an asset that secures itself.
Key takeaways
- The repayment horizon should mirror the horizon of the thing being funded.
- Working capital is for needs that pay themselves back inside a few months.
- A line of credit is worth having before you need it, not during.
- Equipment finance is usually cheaper than general capital because the asset secures it.
- The expensive mistake is almost never the rate — it is the wrong structure for the job.
Owners tend to shop for capital by price. Underwriters think about it by shape. Getting the shape right is worth more money than winning on rate, because the wrong shape charges you every single week of the term.
The one question that decides it
How long until the thing this money buys has paid for itself? Answer that honestly, and the structure usually chooses itself.
| If the payback horizon is… | The structure that fits | Because |
|---|---|---|
| Weeks to a few months | Revenue-based working capital | Repayment tracks the cash the purchase generates |
| One to five years | Term loan | Fixed payments across a defined, predictable life |
| Recurring and unpredictable | Line of credit | Draw when the gap appears, repay when it closes |
| The life of a machine | Equipment finance | The asset itself secures the facility, lowering the cost |
Revenue-based working capital
Repaid through regular fixed payments tied to your revenue cycle, typically over a few months to around eighteen. Priced as a fixed cost rather than accruing interest, so the total is known at signing. The fastest structure to put in place and the most flexible on credit profile.
- Right for: inventory buys, materials and labour on a job you have already won, bridging a receivable, covering a seasonal trough, taking on work you would otherwise decline.
- Wrong for: buying a building, a five-year asset, or refinancing long-term debt.
Term loan
A lump sum repaid on a fixed schedule over a defined period. Predictable, straightforward to budget around, and typically the lowest cost per dollar over longer horizons. It asks more of your file in exchange — stronger credit and longer trading history generally get the best versions.
- Right for: an expansion, a second location, a defined project with a multi-year return.
- Wrong for: an urgent gap this week, or a need whose size you cannot yet pin down.
Line of credit
A limit you can draw against and repay repeatedly, paying only for what is drawn. The distinguishing feature is optional use — an undrawn line costs little and sits there.
Equipment finance
Capital tied to a specific asset, where the asset itself provides the security. That security is why equipment finance generally prices below general working capital and stretches across longer terms.
- Right for: trucks, machinery, kitchen build-outs, medical and dental equipment, anything with a resale market and a multi-year working life.
- Wrong for: consumables, software subscriptions, or anything that is worth nothing the day after you buy it.
What choosing wrong actually costs
Two failure modes account for nearly all of the damage, and they are mirror images.
- 1Too short for the job: a three-year asset repaid over six months. Every week is a cash-flow squeeze, and the pressure often triggers a second facility — which is how a good business ends up over-committed.
- 2Too long for the job: a 60-day receivable gap financed over two years. You pay for eighteen months of capital you stopped needing after two.
Both are structure errors, not pricing errors. Neither is fixed by negotiating.
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Frequently asked questions
What is the difference between working capital and a term loan?
Working capital is shorter, faster to arrange, priced as a fixed total cost, and repaid on a schedule that tracks your revenue cycle. A term loan is longer, repaid on fixed instalments with accruing interest, and generally requires a stronger credit and trading profile.
Can I have more than one facility at a time?
Yes, and it is common — for example equipment finance alongside a working-capital facility. What matters is that the combined payments stay comfortably inside what your deposits support. Stacking short-term advances to cover other short-term advances is the pattern to avoid.
Which option is cheapest?
Per dollar borrowed over a long horizon, equipment finance and term loans usually price lowest because they are longer and, in the equipment case, secured. Over a short horizon, working capital often costs fewer absolute dollars because it is outstanding for less time.
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Published by Express Capital Funding, a direct lender to U.S. small and mid-sized businesses. This article is general information, not financial, legal, or tax advice, and is not an offer or commitment to lend.
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