Is a Line of Credit or Term Loan Better for Your Business?
Having extra capital for your business expenses comes in handy. When you upgrade, you may need a large sum of money to invest in new equipment and additional employees, and when something breaks down or a check is held, it’s crucial to have the funds readily available to cover your expenses. Depending on what sort of expenses you anticipate, either unsecured lines of credit or term loans might suit your business better at a particular time.
Lines of Credit
A line or credit works similarly to a credit card in that you can use credit up to a certain amount to cover expenses and then pay it back either when you have the cash on hand or with a payment plan. A secured line of credit requires collateral that can be confiscated if you fail to repay the amount credited, whereas unsecured lines of credit do not require collateral.
Your business line of credit is useful when you need short-term financing. Instead of using your credit to pay for long-term investments, a line of credit is ideal for emergencies. If you need take care of an expense at the last minute, but don’t have the funds, using your credit to pay down bills and unexpected expenses until cash flow increases again makes good business sense and can keep your business running smoothly even when income is unreliable.
A term loan works to help pay for long-term investments, or anything that you’ll need more than a few months to pay off. The total sum of the loan is delivered to you immediately, and you can pay it off gradually over several months or years, depending on what makes the most sense. Unlike unsecured lines of credit, loans are reliable in that payments are always set beforehand, so you never have to be surprised at your loan billing statement.
Using your term loan to invest in new equipment or new products that you anticipate will make money over a long period of time can help you regulate your expenditures and keep ahead of your budget. If you can show the lender how the loan will help your business increase over time, you’ll have an easier time convincing a lender to give you a good interest rate.
Which Is Better?
Both unsecured lines of credit and term loans have their uses. Whether you need quick emergency funds or you’re planning on increasing your business over time, having the extra cash available can help you grow your business quickly and reliably.