Unless you’re independently wealthy, you’ll likely have to borrow some money to get your new business off the ground. After all, they say you have to spend money to make money.
When considering your financing options, you’ll likely consider both a business line of credit and a term loan. Both of these financing options are excellent for small business owners, but they each have their pros and cons and the best choice depends on your preferences.
Keep reading for more information about each type of loan to help you decide – business line of credit vs. loan.
Business Lines of Credit
Business lines of credit are similar to personal lines of credit. These usually include home equity lines of credit and credit cards.
They work by giving you access to a certain amount of money. You won’t make payments or incur interest until or unless you use the funds.
For business use, lines of credit can either be secured or unsecured, often by receivables or inventory.
Business lines of credit are often also called revolving because you can use them again and again. Once you repay the loan, you have access to the full amount to borrow again without reapplying.
As you can see, this is a similar concept to using a credit card. Business lines of credit often have lower interest rates and fewer closing costs than traditional loans.
The downside? If you don’t make timely payments or you use more than you’re allowed, your interest rate may go up. With term loans, the interest rate remains the same for the entire life of the loan.
When you take out a business loan, you borrow all of the money at once and repay it over the term, or specified time period of the loan.
The repayment term may range from one year to 20 years, it just depends. Whereas business lines of credit are often renewed every few years, term loans are fixed for the entire repayment period.
You’ll select your loan terms such as the length of the repayment period and whether the interest rate is fixed or variable.
Generally, loans require collateral, but there are options for new businesses who lack collateral when they startup.
When you take out a loan, you’ll begin repaying it right away, even if you haven’t used the money yet. Once you run out of funding from the loan, you’ll have to apply for another one.
You’ll pay more in interest and closing costs with a term loan.
Business Line of Credit vs. Loan? The Choice is Yours
There is no clear answer to the question between obtaining a line of credit vs. loan.
There are pros and cons to each option. Which is right for you depends on the needs of your business.
Whichever option you choose, we are here to provide the financing you need. Contact us today to explore your options or click here to apply directly.