Line of Credit Vs Business Loan? (Views: 560)
Mon, 16 Jan 2017 11:43:07
When you are looking for capital to grow your small business, you may be debating between a line of credit and a business loan. Here are some ways business loans and lines of credit differ and in what situation should you apply for each one.
- A business loan is better for larger and longer-term purchases. A line of credit is for the short-term easy-to-pay-back purchases.
- A business loan is designed for a one-time use, often for a single purpose. A line of credit can be used multiple times, typically on a revolving basis.
- A loan covers the cost of a specific purpose while a line of credit helps finance ongoing operating expenses, and acts as backup cash.
- A business loan has a fixed, pre-determined repayment model. With a line of credit, the borrower makes payments based only on the amount they used, plus interest.
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A line of credit provides you access to a specific amount of cash for which you do not need to make payments or incur any interest for until you start using the funds. Lines of credit are often referred to as revolving since you can use the funds repeatedly. A line of credit typically has a lower interest rate than a loan of comparable amount. Lines of credit can help small businesses with short-term financing needs, such as payroll, seasonal expenses and cash flow shortages. A line of credit provides you with a cushion of cash when you need it, that’s why it is best to apply for a line of credit before you require the funds. Be sure not to tie up your line of credit by paying for long-term investments, or you won’t have access to it in case of an emergency.
A business loan, provides you access to a defined amount of money, all at once which you need to pay back over a specific time period or term, even if you do not start using the funds right away. A business loan could have different repayment periods and fixed or variable interest rates. Interest rates for business loans are typically higher than those on a business line of credit. Business loans work best for long-term investments. The purpose of the loan and how it will help increase your business’ growth must be shown to prove that the business will be able to pay off the loan.
Here is a situation where you might use a business loan:
A pizza restaurant owner wants to expand into the recently available space next door. The expansion will necessitate the purchase of two more pizza ovens that will last for 10 years each. It is wiser to get a business or equipment loan and extend payments over the term of the oven and save the line of credit for other short term needs.
Here is a situation where you might use a line of credit:
A landscaping business has completed several projects and is waiting for payment from clients. However, the business owner needs to pay its employees in two days and does not have the cash in the bank. They could use the line of credit to cover payroll, then pay reduce the line of credit when the clients pay.
Working with LendMart can ensure that you easily find the right loan for you.