A term loan advances a fixed amount repaid on a set schedule; revolving credit provides a limit that can be drawn, repaid, and redrawn repeatedly, with each designed for a different type of funding need.

Term loans are appropriate for defined capital expenditures: buying equipment, funding a leasehold build-out, financing an acquisition. The amount is fixed, the repayment schedule is set, and the loan is retired over time. Revolving credit, the operating line, is appropriate for working capital: fluctuating needs that ebb and flow with the business cycle.

Using a revolving line to fund a capital purchase, or a term loan to cover working capital, creates structural mismatches that cause cash flow problems over time. The operating line that never fully repays signals that it is funding something other than short-term working capital. The term loan with payments that strain monthly cash flow signals it was sized incorrectly for the revenue it was meant to support.

Matching the right financing structure to the right purpose is a discipline that prevents structural cash flow problems before they develop. See how Wefinx approaches Virtual CFO services.

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