Use of funds: replace a credit line
A frozen or termed-out line hits two ways: the availability disappears and the drawn balance turns into a fixed payment. Here is the order of operations and what each replacement really costs.
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Updated October 13, 2026 · Merchant Fund Express
First get the reason and the new terms in writing, then build a 13-week cash calendar, then ask suppliers for terms, and only then size a replacement. The cheapest replacement is another line of credit if your file meets Tier 1, starting from 1% per month. Revenue-based funding costs more but can arrive faster and accepts files a bank line will not. Use it for the specific gap in your calendar, not to rebuild the whole old limit.
A food distributor, 9 years in business, $210,000 a month in revenue. Its $150,000 bank line had $70,000 drawn. At annual review the bank froze new draws and termed out the $70,000 over 12 months: about $5,833 a month in principal plus interest. A seasonal inventory buy of $80,000 is due Nov 1, 2026 and sells through over about three months.
Option A: Tier 1 line of credit, illustrated at 1% per month. Draw $80,000, repay a third each month as inventory sells.
| Item | Amount |
|---|---|
| Month 1 interest on $80,000 | $800 |
| Month 2 interest on $53,333 | $533 |
| Month 3 interest on $26,667 | $267 |
| Total cost | $1,600 |
Option B: revenue-based funding, illustrated at a 1.25 factor, no fee deducted, repaid weekly over 25 weeks.
| Item | Amount |
|---|---|
| Funding and net proceeds | $80,000 |
| Total repayment | $100,000 |
| Cost | $20,000 |
| Weekly payment | $4,000 (about 8.3% of weekly revenue) |
| Payments run | Nov 2, 2026 to Apr 19, 2027 |
Option C: supplier terms. Net 60 on half the order means borrowing $40,000 instead of $80,000, which halves the cost of either option. Losing a 2% early-pay discount on $40,000 costs $800.
The gap between $1,600 and $20,000 is why Option A comes first if the file qualifies. Option B fits when the file misses Tier 1 or the inventory is due before a line can be set up. Remember the termed-out $5,833 a month is already in the calendar, so test the combined payments with the payment burden calculator.
All figures in worked examples are illustrations of the arithmetic, not offers or quotes. Real terms depend on your file and the funder.
The termed-out bank balance is now debt on your statements, and it counts. Tier 1 allows at most 2 existing positions; a term loan must be in first position, but a line of credit can sit in second. The revenue-based tier allows up to 2 current advances. If you already carry an advance, see funding with an open line of credit and positions and stacking.
Check yourself against Tier 1 line by line on the requirements page. If every line is a yes, start there; if one is a no, read Tier 2. Then apply with the bank's letter attached.
Common reasons include an annual review, a covenant miss, a credit score change or a drop in deposits. Ask for the reason in writing; it tells you what to fix.
It is debt with a payment, so a reviewer sees it and includes it in affordability. It is not a reason to be declined by itself.
It is a lump sum with fixed payments, not a revolving line. Use it for a specific gap. If you meet Tier 1, a line of credit is usually far cheaper.
On Tier 1, a line of credit can be in second position. A term loan must be in first.
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