Term Loan vs Line of Credit for Inventory: Which Is Smarter?
Compare term loans and lines of credit for inventory financing. Understand which works better for seasonal, bulk, and ongoing inventory needs.
Inventory ties up cash. Whether you are stocking up for the holidays, taking advantage of bulk discounts, or maintaining regular stock levels, you need working capital. Both term loans and lines of credit can fund inventory — but they work differently.
The right choice depends on whether your inventory needs are one-time or ongoing.
Quick Comparison
| Factor | Term Loan | Line of Credit |
|---|---|---|
| Funding | Lump sum upfront | Draw as needed |
| Interest | On full amount from day 1 | Only on amount drawn |
| Repayment | Fixed monthly payments | Flexible, often interest-only option |
| Availability | One-time funding | Revolving — repay and reuse |
| Best For | Large, one-time purchases | Ongoing or seasonal needs |
| Typical Rates | 8-25% APR | 10-35% APR |
| Term | 1-5 years | Revolving, annual renewal |
When Term Loans Work for Inventory
A term loan makes sense for inventory when:
- One-time bulk purchase — You are buying a large quantity at a discount
- Known payoff timeline — You know when the inventory will sell and can match payments
- Supplier requires payment upfront — You need the full amount now
- You want predictable payments — Fixed monthly amounts simplify planning
- Lower rates available — Term loans often have lower rates than lines of credit
The Bulk Discount Scenario
If a supplier offers 15% off for ordering $200,000 at once instead of monthly, the savings likely exceed term loan interest. Run the math before deciding.
When Lines of Credit Work for Inventory
A line of credit makes sense when:
- Inventory needs fluctuate — Draw more during busy seasons, less during slow periods
- You restock regularly — Ongoing inventory purchases benefit from revolving access
- Cash flow is variable — Only borrow what you need, when you need it
- You want flexibility — Pay down and redraw without reapplying
- Seasonal business — Stock up before peak season, pay down after
Cost Comparison: $100,000 Inventory Purchase
Compare the true cost of each approach:
| Scenario | Term Loan (12 mo) | Line of Credit | Notes |
|---|---|---|---|
| Rate | 15% APR | 18% APR | LOC rate higher |
| Amount Borrowed | $100,000 | Avg $60,000 drawn | LOC drawn as needed |
| Annual Interest | ~$8,300 | ~$10,800 | Based on avg balance |
| Monthly Payment | ~$9,025 | Interest only: ~$900 | LOC more flexible |
| Availability After | Closed, must reapply | Ready to use again | LOC revolves |
The Hidden LOC Advantage
If your inventory turns quickly, you might only draw on the line for 30-60 days at a time. Interest on $100,000 for 45 days at 18% APR is about $2,200 — far less than a full year of term loan interest.
Inventory Turnover Matters
How quickly you sell inventory determines the best financing choice:
| Turnover | Days to Sell | Better Choice | Why |
|---|---|---|---|
| High (12x/year) | 30 days | Line of Credit | Quick paydown, minimal interest |
| Medium (6x/year) | 60 days | Line of Credit | Still benefits from flexibility |
| Low (4x/year) | 90 days | Either | Depends on predictability |
| Very Low (2x/year) | 180 days | Term Loan | Spread payments over longer period |
Seasonal Business Scenario
Scenario: Holiday Retailer
Situation: You need $150,000 in inventory by September for holiday sales. Most sells by January.
- Term Loan Approach: Borrow $150,000 in August, make payments Oct-Sep ($13,500/mo at 15%), pay interest on full amount all year
- LOC Approach: Draw $150,000 in August, pay down as holiday sales come in (Oct-Jan), by February the balance is minimal
The Seasonal Math
For this scenario, the LOC might cost $6,000-8,000 in interest if you pay down quickly after the holidays. The term loan costs ~$13,000 even though you did not need the money after January.
Hybrid Approach
Many businesses use both:
- Base inventory: Line of credit for regular restocking
- Major expansions: Term loan for large one-time purchases
- Seasonal peaks: Draw more on the LOC, pay down after
- Opportunistic buys: LOC for fast access to closeout deals
Qualification Differences
| Factor | Term Loan | Line of Credit |
|---|---|---|
| Minimum Credit | 600-650 | 620-680 |
| Time in Business | 6 months+ | 1-2 years typical |
| Revenue | Varies by amount | Often higher requirements |
| Collateral | May be unsecured | Often requires collateral or UCC |
| Documentation | Standard | May require ongoing reporting |
Bottom Line
For one-time, predictable inventory purchases, term loans offer lower rates and fixed payments. For ongoing, variable, or seasonal inventory needs, lines of credit provide flexibility that reduces total borrowing costs.
The Decision Framework
Ask yourself: Will I need to buy inventory again in 6 months? If yes, a line of credit is probably smarter. If this is a one-time expansion, a term loan may save money.
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Read more →Important Disclosure
Not Financial Advice: The information provided in this article is for general informational purposes only and does not constitute financial, legal, or professional advice. You should consult with qualified professionals before making any financial decisions.
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