Which is Better: Line of Credit or Term Loan? Pt 2
Which is Better?
Depending on the current financial situation of your business and your future needs, one may be better for your business than the other. A term loan for a business is best used as an investment. If your company needs to purchase fixed assets, additional equipment, or purchasing a business, a term loan will give you a lump sum payment that you can use for whatever your business needs. Then you will have monthly payments to settle it off until it is completely paid off.
Note that you will not be able to take more money out with the same loan though; it is a fixed amount. If your business needs more money after this loan is paid off, you can apply for another term loan. When applying for the loan, be prepared to show the bank what you need the money for. Have a plan that you can show them that explains how the money will be spent, and how this will make your company more money. When they see this, they will be more likely to lend you the money, as they have seen your business plan and have faith that you will not have any issues paying it back.
A business line of credit is beneficial to a business that needs the funds as operating funds. This means the money will be used for business expenses. It may be used for paying bills, purchasing equipment that may be needed down the road, and to cover any surprise costs when you do not have the additional cash flow to cover.
A line of credit is a great option for those who are looking for something short term. If you know you will be able to pay it off in less time than a term loan, or if you think you might not even use most of it, then a line of credit may be the way to go for you. Since you are only charged interest on the amount that you use, and you can view your balance at any time, some choose this option over a term loan because it can be dealt with or paid off simply when you have the money to make the payments.
When deciding what is best for your business, it is better to review your business and see where you are sitting currently. Then look at the goals you have set for your business and what you need to achieve that goal. Once you have this information, you can have a rough idea of how much you are going to be asking for your line of credit or term loan, and how soon can you pay it off. Once you know the answer to this question, you will be ready to decide what is best for your business.