Term Loan vs. Line of Credit: Which One Is Better for Your Business?

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No matter how successful your business is, there may come a time when you need a little extra cash flow to finance your next move.  There are plenty of companies out there ready to hand you that money, but at what cost?

Knowing what you are getting into before you sign on the dotted line is important.  Terms that look pretty at first can end up costing you an arm and a leg by the time you finish paying them off.

Two of the main types of loans that many businesses look into are term loans and lines of credit.  Learning the difference between the two can help you determine which one is better for your business in the long run.

Term Loans, and What to Expect

In a business term loan, you receive a certain amount of money at once and then pay it off over a specific time period.  This can range from one year to twenty years, and the rate is fixed for that period, so you know exactly how much you need to pay each month and when it is due to be paid off.

These types of loans can be secured with collateral, or unsecured.  Term loans can have different repayment periods and different rates, but the loan repayment must begin immediately.

Term loans can include extra fees like closing costs, and if you use all of the funds, you have to apply for a new loan.

What is a Line of Credit?

A business line of credit is similar to a credit card or a home equity line of credit.  In a line of credit, also known as a revolving loan, you have access to a set amount of financing for a predetermined period of time.

You begin making payments on this loan once you begin using the money, but you can access the full amount at any time, like using a credit card.

Lines of credit can be secured or unsecured.  Collateral for a secured line of credit is often your inventory or receivables.

These types of loans often have lower interest rates and closing costs than other loans, but the terms are stricter.  If you make a late payment or use more than your limit, your interest rates can increase.

More details on business line of credits can be found online or by calling financial institutions.

Which One is Best for Your Business?

Both types of loans offer you immediate access to the funds that you need, and both have their pros and cons.  Ultimately, you have to choose the one that is best for your bottom line.

Do you need a revolving amount of money, a little here and a little there, that you have access to through the end of the term?  Or do you need a large sum of money right away, with set interest rates and a specified time period to pay it back?

Whichever way you go, there is a loan that is right for you and works for what you need.