Which is Better: Line of Credit or Term Loan? Pt 1
When it comes to capital for your business, there are a few ways of going about that. When you go to a bank to talk about your needs, you will likely be offered a line of credit or a term loan. Knowing the differences between the two will allow you to choose the best option for you and your growing business.
Differences between Line of Credit and Term Loan
A business line of credit is very much like a personal line of credit or home equity credit line. It is also similar to a credit card. This means that you will have access to finances, if you need them. The line of credit will allow you to have access to the amount your business is approved for, and you will not be making any payments on it, or paying any interest on it, unless you actually used that money.
Lower interest rates are a common benefit of having a business line of credit. The closing costs are also lower than if you choose to take out a term loan. Now, a big difference between a business line of credit and a term loan is that if you start missing payments, or your payments start tricking in late, your bank may start charging you a high interest rate on a line of credit. On a term loan, your rates will stay the same throughout the length of the term.
A business line of credit can be renewed every year or so. This way, you can go over your credit line with your bank during this time, and adjust or plan as needed. For a business term loan, you would need to talk to your bank and they would then give you the money in one lump sum. Before approaching the bank, you should know how you plan to pay it back within the period (term) you have agreed upon.
Term loans can be very attractive to some as you can choose the term and interest rate (fixed or variable) at the time you take the loan. Yet repayments on the term loan will begin immediately after the loan is taken out, even if you have not touched the money yet. The interest rates and the closing costs are known to be higher for a term loan than with a business line of credit.