Line of Credit vs. Term Loan for Covering Payroll Gaps
Insurance reimbursement lags payroll by weeks, not days. Here's why that gap is usually a line-of-credit problem, not a term-loan problem - and what it costs to get it wrong.
The mismatch
Why reimbursement timing creates a cash gap at all
Payroll runs on a fixed biweekly or semi-monthly schedule. Insurance reimbursement doesn't - claims commonly take 30 to 90 days to pay out depending on the payer, and a single denied or delayed claim can push it further. The gap between "services rendered" and "cash in the account" is structural, not a sign anything is wrong with the practice, but it still has to be covered from somewhere in the meantime.
Why a line of credit fits and a term loan usually doesn't
A line of credit is revolving: you draw what you need when a gap opens, pay interest only on the drawn amount, and repay it once the reimbursement lands - then the available credit is back for next time. A term loan gives you a lump sum with a fixed payment schedule that keeps going whether or not a gap currently exists, which turns a temporary, self-resolving timing issue into a fixed multi-year obligation.
- Line of creditRevolving, interest on drawn balance only, resets after repayment
- Term loanLump sum, fixed payment for the full term regardless of whether the gap has closed
Worked example
A $60,000 gap, covered two different ways
A practice needs $60,000 to cover payroll while a batch of claims clears, expected to be paid in 45 days.
| Line of credit | Term loan | |
|---|---|---|
| Structure | Draw $60,000, revolving, 10% APR | $60,000 lump sum, 11% APR, 5 years |
| Repayment | Full balance repaid in 45 days once claims pay | Fixed $1,304/month for 60 months |
| Cost to solve this specific gap | $740 (interest for 45 days) | $18,240 (total interest over 5 years) |
Line of credit interest = Principal × APR × (days ÷ 365). Term loan monthly payment via M = P × r × (1+r)ⁿ / ((1+r)ⁿ − 1).
The line of credit costs $740 to solve a 45-day problem. The term loan costs $18,240 in interest alone, spread across 5 years, to solve the same 45-day problem - because the debt doesn't go away when the claims pay out, it just keeps running. The term loan isn't a worse product, it's the wrong tool for a timing gap specifically.
When a term loan is actually the right call
Not every cash need is a timing gap
If the shortfall isn't reimbursement timing but an actual structural gap - claim denials running persistently high, or overhead that's outgrown current revenue - a revolving line just delays the reckoning and racks up draws that never fully clear. That's a case for a term loan sized to the real fix, or for addressing the underlying billing or staffing issue directly.
Mistakes when choosing between the two
- Taking a term loan for a reimbursement gap because it was the first offer received, without pricing what a line of credit would cost for the same timeframe.
- Using a line of credit to paper over a structural revenue shortfall that a temporary draw will never actually resolve.
- Not asking whether the line of credit is renewed annually and under what conditions the limit could be reduced.
- Waiting until a gap is already urgent to apply, when a line of credit is far easier to get approved before it's needed.
FAQ
Common questions
Why not just use a term loan for reimbursement timing gaps?
A term loan gives you a lump sum and a fixed multi-year payment, which is a poor match for a problem that resolves itself in 30-90 days once the claim is paid. You end up paying interest on the full amount for years to solve a problem that lasted weeks.
Do I need a new line of credit every time this happens?
No - that's the point of a revolving line. Once approved, you draw against it when a reimbursement lag creates a gap, repay it when the claim pays out, and the available credit resets for the next cycle without reapplying.
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