Cash flow
Working capital vs. line of credit when your receivables run 45 days
- Published
- Reading time
- 8 minutes
- Written by
- MMC Underwriting Desk
If you sell to distributors, grocery chains or restaurant groups, you have a structural cash gap. You pay for product at or near delivery and you get paid 30 to 60 days after you invoice. That gap does not close as you grow — it widens, because every new account adds receivables before it adds cash. The question is not whether to finance it. It is which instrument to use, and the difference between the two most common answers is roughly four times the cost.
The two products
A line of credit is a revolving limit. You draw what you need, pay interest only on the outstanding balance, repay as cash comes in, and draw again. A short-term working capital advance is a lump sum repaid through fixed daily or weekly debits over three to eighteen months, priced as a factor rate rather than an interest rate.
They feel similar at the point of sale — both put money in your account quickly — and they behave entirely differently across a year of use.
A worked comparison
Take a processor invoicing $600,000 a month on net 45, needing roughly $250,000 of working capital cover at any given time, across twelve months.
| Measure | Line of credit | Working capital advance |
|---|---|---|
| Structure | $400,000 revolving limit | Four sequential $250,000 advances |
| Headline price | 12.5% APR on drawn balance | Factor 1.22, roughly 6 months each |
| Average balance carried | $250,000 | $250,000 equivalent |
| Cost of money over the year | ~$31,300 | ~$110,000 |
| Repayment mechanics | Interest-only monthly, principal as you choose | Fixed daily debit, roughly $2,050 per business day |
| Effect of paying down early | Interest stops accruing immediately | Little or no saving on a true factor rate |
| Flexibility if a customer pays late | Draw stays out, cost rises slightly | Debit continues regardless |
| Renewal risk | Annual review | New underwriting each time |
The difference is roughly $79,000 a year on the same $250,000 of working capital. For a processor running a five percent net margin, that gap is the profit on about $1.6 million of revenue.
Why the expensive product gets sold anyway
Three reasons, and only one of them is about you.
- Speed. An advance can fund in a day. A line takes two to seven business days to open. When the need is urgent, the fast product wins on the only axis being measured at that moment.
- Credit tolerance. Advances underwrite to deposit history rather than financial statements, so a business that would not qualify for a line can get one. For some borrowers the expensive product is genuinely the only product.
- Broker economics. Advances pay materially more commission than lines of credit. That is a real and well-documented feature of this market, and you should know it when someone recommends one.
When the advance is genuinely right
We place them, and we would not if they were never correct. The cases are specific.
- The alternative is losing inventory. A failed compressor with product at risk is a case where 70 percent APR on $75,000 beats a $96,000 loss with certainty.
- Bridging to a cheaper approval. If SBA or equipment financing is four to eight weeks out and the need is now, a short bridge repaid on approval is rational.
- You do not qualify for anything cheaper. If deposit history is all you have, this is the product that exists for you. The right response is to use it once, repay it, and build toward a line.
- A genuinely unrepeatable buy. A distressed lot at a price that will not return can justify expensive money for a short period.
What does not qualify: covering a recurring, predictable, structural gap. A 45-day receivable cycle is the most predictable thing in your business. Financing it with an emergency instrument, four times a year, every year, is paying an emergency premium for a scheduled event.
The stacking problem
The failure mode that ends businesses is stacking — taking a second advance while the first is still being repaid, then a third to cover the first two. Daily debits compound until they exceed what the business can generate, and at that point the only remaining move is another advance.
Most of the refinance files that reach our SBA desk exist because of this. A processor with three simultaneous advances taking $2,900 a day out of the operating account is profitable on paper and insolvent in practice. If you already have one advance and you need more money, the correct next call is a consolidation conversation, not another advance.
What to do
- Open a line before you need it. A line you never draw on costs a small unused fee. Opening one in a calm month is far easier than in a crisis month.
- Size it to your actual gap. Average receivables outstanding is the right starting point, plus a margin for a slow payer.
- If you do not qualify yet, ask why specifically. Usually it is time in business, negative days, or missing financials — all fixable on a known timeline.
- Consider factoring as a middle path. If your customers are strong and your own file is thin, factoring is generally cheaper than an advance and does not add debt.
- If you take an advance, plan the exit at the same time you take it. Write the refinance date down. The advance is a bridge, and a bridge with no far bank is just a longer fall.