Line of Credit or Term Loan: Which Type of Funding Fits Your Business?

Every business needs extra cash sometimes. In today’s fast-moving financial environment there are many different ways to raise money, some of which are quite complex. Two of the more straightforward sources of cash are the Line of Credit and the Term Loan. Both can be simple to administer and both allow you to retain control over your business.

Line of Credit

A line of credit works in a similar way to your credit card. There is an agreed limit to the amount you can borrow, and an agreed interest rate. It is like a pot of money that you can dip into (for a price) whenever you need to. When you repay what you owe, that money is still available for you to borrow again during the duration of the agreement. Agreements usually last for a couple of years and can be renewed.

Read also: Things to Know About Term Deposit Interest Rates

Interest rates can be competitive, but (as with a credit card) it is easy to miss an interest payment. Do this, or go over your limit, and you might be penalized quite severely.

Which Situations Suit a Line of Credit?

A line of credit is generally best for repetitive short-term expenses, like issues with cash flow or seasonal fluctuations in work. It is like an insurance against this sort of problem, which could slow or even crash your business.

As with an insurance policy, it is a good idea to establish a line of credit before you need it. Visit a specialist website for help with applying for a line of credit.

Term Loan

A Term Loan is a fixed amount you receive from a bank or finance institution. It comes with an agreement to repay the loan (with interest) at regular intervals, normally monthly. The loan can be secured against your business assets, or unsecured.

The rate of interest is often fixed at the outset and you are provided with a schedule of repayments. There are flexible offers available, but the cheapest rates will normally be for those loans that have regular equal payments. Because you know how much you must repay each month, it is easy to program the payments into your accounts.

Which Situations Suit a Term Loan?

A term loan is generally better for major one-off costs, especially those that are designed to increase the size and turnover of your business and which will pay for themselves in the long term. This would include things like the purchase of property, vehicles, or machinery.

If you can show the lender how the planned investment will increase your profits over time, they will be more ready to risk their money with you. Getting a term loan, especially an unsecured one, becomes easier the longer your business has been successful.

Your Business, Your Choice

Every business works in a different way—one type of finance may suit you; another would suit your neighbor. Look carefully at the options available and seek expert advice, and you will find an affordable loan that will work for your business.