As a business owner there may come a time when you need additional capital to run or grow your company. There are a number of financing options at your disposal, such as lines of credit and term loans. If you’re debating over which product to use consider the differences between the two and how they can best meet your needs.
A line of credit for small businesses is a short-term funding solution that provides a specific amount of money to the borrower. Due to its flexibility, it is also referred to as “revolving” loan. You can use the money at any time, as long as you do not exceed the set limit. You can borrow and pay back repeatedly without applying for another loan. There are two types of credit lines – secured and unsecured. A secure line of credit requires collateral whereas unsecured does not. However, the interest rate and closing costs on the latter are much higher.
Lines of credit are best used for daily operating expenses, which is why it’s commonly known as an operating line of credit. If you experience a temporary shortfall in cash flow, have problems meeting payroll or need more inventory, then it’s the ideal option for those situations. It provides the financial cushion you need when faced with short-term emergencies. This is why the best time to apply for this funding source is before you actually need it.
A term loan, on the other hand, is a lump sum of money given to the borrower. It usually has a fixed interest rate and requires repayment over a specific time frame, which is called a “term.” The loan period can last up to 20 years. The closing costs and interest rates are higher than the lines of credit. In addition, you are required to repay even before you begin accessing the funds.
If you need capital for major expenditures, such as buying a building or new equipment, term loans are the better option. Use them for long-term investments that will boost your sales and profits. In fact, approval for this funding requires that you provide documentation showing the lender how the loan will contribute to the success of your business.
Business lines of credit are a viable choice when you need a quick infusion of finances to cover daily expenses. Term loans are recommended for buying fixed assets that boost your bottom line. Before making a final decision, thoroughly research all the ben
