Sometimes, cash flow gets tight. Business is running, orders are coming in but the gap between paying bills and getting paid starts to pinch. That’s when you look around for a breathing space — something flexible, maybe quick and reliable. That’s where working capital options step in.
The two most common choices people weigh at this stage are short-term loans and lines of credit. Both help bridge temporary working capital gaps, but they function differently. If you’re comparing them to understand what suits your business model better, this guide breaks it down so you can take an informed step forward.
Understanding short term borrowing solutions
This is typically a fixed and one-time borrowing arrangement where the full amount is disbursed upfront. You repay it over a defined period, usually less than a year with a predetermined interest rate and structure.
When this option is beneficial:
- If you have a specific requirement in mind like purchasing raw materials in bulk at a discount or upgrading office equipment then this structure works well.
- If you’re confident about cash inflows during the repayment window, this approach offers clarity and discipline.
- Fixed interest and repayment terms make it easier to project financial outflows and manage liabilities.
Key points to keep in mind
While a short-term loan offers predictability, interest applies on the full disbursed amount from the start even if you don’t use it all at once. It also lacks flexibility. If your needs change then you may not be able to adjust the loan structure mid-way. Once repaid, a new application is required to borrow again.
Exploring flexible credit access
Unlike a fixed loan, a line of credit gives you access to a sanctioned limit which you can draw from multiple times. Interest is charged only on the amount you use and you can repay and reuse the limit as needed within the validity period.
Why it works for many businesses:
- This gives you on-demand access. It is useful for businesses facing irregular cash inflows or fluctuating expenses.
- Since interest applies only to the utilised portion, it helps optimise cash outflows.
- Helps you handle working capital disruptions without repeated loan applications.
Things to be aware of
Discipline is essential while a credit line gives freedom, overuse can lead to increased debt if not managed well. Also, some credit lines may come with annual maintenance fees or minimum usage conditions. It’s important to review the fine print and align it with your operating style.
Evaluating based on business needs
Both financing tools serve short-term requirements, but they’re structured for different use cases. The better choice depends on your working capital cycle, spending patterns and how much flexibility your business needs.
A loan is likely to be more suitable if:
- You have a defined and one-time expense with a clear repayment plan.
- You prefer the discipline of a fixed repayment schedule.
- You don’t anticipate needing additional funds in the near term.
A credit line may be a better fit if:
- You experience frequent but unpredictable cash flow fluctuations.
- You want a cushion for recurring short-term gaps, like delayed client payments.
- You’re looking for reusable funds without reapplying each time.
Considering additional working capital tools
In specific business scenarios, added instruments can complement these solutions. For instance, if you’re involved in international trade then a letter of credit might help secure transactions with overseas suppliers or buyers. It serves as a financial guarantee and ensures that payments are made as agreed.
Similarly, exporters often look into export credit facilities to support production and working capital while awaiting overseas payments. These tools aren’t substitutes for loans or credit lines but can support overall cash flow planning.
Making the right choice
Choosing between a short term loan and a line of credit depends on how your business earns, spends and grows. The key is to align the structure of the financial product with the nature of your operations. Consider your ability to repay, how frequently you may need funding and how predictable your revenue is.
Before finalising any facility, review the terms closely including the interest rates, charges, repayment obligations and renewal processes. A transparent discussion with your financial advisor or relationship manager can help you make an informed decision that supports your business goals.