Wondering what is best for your business? There are many options when it comes to seeking capital for the purpose of running and growing your business. When considering between a long-term business loan and line of credit, do you know which would work to your advantage? Most companies need money when starting, building their businesses, or when facing a short-term cash flow challenge.
Deciding to apply for a business loan generally means you have a purpose for the money, such as purchasing equipment, expanding your business, or planning new construction. A line of credit can be used over and over again, but credit lines can also be reduced or terminated if you can no longer prove your ability to pay. A line of credit is useful if you know you may have purchases in the future, but no specific needs right away.
Once your loan is funded, your business begins payment right away, normally a fixed amount, at a fixed rate, over a fixed period of time. With a line of credit, you only pay for what you owe. However, the interest rate on a line of credit will most likely be a variable rate. This can obviously work to your advantage, but conversely can end up costing a lot more. It is also worth considering other costs.
|
Business Loans |
Business Lines of Credit |
| A good long term option | A better short term option |
| Lump sum all at once | Access to revolving amount of cash as needed |
| Usually collateralized | Can be secured or unsecured |
| Interest paid on full amount | Incur interest on amounts used only |
| Repayment starts immediately | Repayment starts once line of credit is utilized |
Often, obtaining both business loans and business lines of credit can be a challenge if your business is just starting out (your business is new), or your credit history is less than perfect. If you have yet to establish your business, have little or no credit history, and only a small amount of sales, lenders may decline your request. If you do not qualify, there are many other options when it comes to improving cash flow. If you have a healthy amount of outstanding accounts receivable, you may want to consider invoice factoring.
