Term loan vs. line of credit: ask for the right tool
Owners spend weeks agonizing over how much to ask for and about four minutes on what kind of borrowing to ask for. From the lending side, the second question told me nearly as much as the first. An application that requests the wrong instrument for the purpose reads like a plan written without understanding how the money will actually move.
Two tools, two different jobs
A term loan is a lump sum with a schedule: you get the money once, you repay it in fixed instalments over a set number of years, and each payment shrinks the balance. A line of credit is a ceiling, not a sum: you draw when you need it, repay when cash comes in, and pay interest only on what's outstanding. One is built for buying things that last. The other is built for bridging gaps in timing. Almost every borrowing purpose falls cleanly on one side of that line.
Match the term to the life of the thing
The principle lenders apply is simple: the repayment period should roughly match how long the purchase keeps earning. A delivery van that works for seven years belongs on a multi-year term loan — the asset produces revenue across the same years the payments run. Inventory you'll sell in ninety days belongs on a line of credit — drawn to buy stock, repaid when the stock sells. When the plan says "$60,000 term loan for seasonal inventory," the mismatch jumps off the page: you'd still be making payments in year three on product that was gone by Thanksgiving of year one.
The mistake that runs the other way
The reverse error is quieter and more dangerous: using a line of credit to buy long-life assets. Picture a landscaper who maxes a $50,000 line on a skid steer. The line is now full, so when the spring payroll gap arrives — the exact job the line existed for — there's nothing left to draw. The machine will earn for eight years, but the debt sits at a floating rate with no schedule forcing it down. Lenders call this a "locked line," and when they see one on your statements, it raises a question about the next request too.
When an owner asked for the wrong instrument, I didn't just correct the request — I re-read the whole plan, because the error usually wasn't the only one.
What the wrong ask signals
Lenders forgive plenty in a first-time applicant, but the instrument mismatch is costly because it suggests the cash-flow forecast wasn't really used. If you'd genuinely mapped your monthly cash movements, you'd have seen where the gaps are temporary (line of credit) and where the needs are permanent (term loan). Asking for one instrument to cover both jobs tells the lender the forecast is decorative. The fix costs nothing: it's a paragraph in your plan explaining which dollars do which job.
Most real requests are both
Picture a $180,000 café request. Done well, it might arrive as $130,000 in term borrowing for fit-out and equipment, matched to their useful life, plus a $50,000 operating line for inventory and the seasonal trough — each piece labelled with its purpose and its repayment source. That structure isn't fancier; it's just legible. A banker can approve pieces of it, price each piece properly, and see that you understand your own cash cycle. A single blended number invites them to structure it for you — and their version starts more conservative than yours.
Write the ask so the structure shows
In your plan's funding section, split the request by instrument and give each line three things: the amount, what it buys or bridges, and how it gets repaid. "Term loan, $130,000, equipment and leasehold, repaid from operating cash flow over the equipment's working life. Operating line, $50,000, inventory and seasonality, revolving with the sales cycle." Two sentences, and the lender knows you've asked for the right tools.
Structure the ask before the meeting
LenderReady builds your plan through a conversation — including a funding request split by instrument, each piece tied to its purpose and repayment source, the way lenders structure it themselves.
Build my planLenderReady is an educational service, not a lender, broker, or financial advisor. Lending criteria vary by institution and change over time; treat this as a starting point, not a guarantee.