If you’re looking for a capital to operate and grow your small business, you may found two solutions: a line of credit and a term loan. Both a business term loan and a business line of credit are great financial options for small business owners —but how does each one work, and which one is better for your particular business? Let’s have a closer look.
Business line of credit
A business line of credit can be useful when you’re in urgent need of cash. Business credit cards have lower interest rates and closing costs than a short-term financing of comparable size. However, if you fall behind with your payments or go beyond your credit line, your interest rate may increase dramatically — unlike a short term business loan rates that stay the same for the life of the loan.
A business line of credit can be secured with inventory, receivables or other collateral, but the most commons lines of credit are typically unsecured debt.
Business lines of credit can be secured or unsecured business loans (typically by inventory, receivables or other collateral). They are often referred to as “revolving,” which means you have access instantly and use the credit again and again. For example, if you have a $10,000 line of credit and take out $5,000, you still have access to the remaining $5,000. If you make payments on that $5,000 until it is back down to $0, you still have access to the entire $10,000 without reapplying. It’s very similar to carrying a business credit card with a certain limit. Once it is paid down, you can charge more items on your credit card.
You can apply for business line of credit when your business has short-term financing needs and operating expenses like payroll, temporary cash flow shortages, and so on.
A term loan is a credit that is given in one lump sum payment that should be usually repaid within a specific short or long term. However, to be approved for this type of funding you will need to show exactly what for you need the money (how do you plan to use the money and how that will help your business increase sales and profits).
What is good about a term loans is that they come in different terms and sizes and there are options for creditworthy borrowers, as well as for start-ups without steady business credit history. As well, since a term loan is a transaction and a line of credit is continuous, they tend to be a bit easier to qualify for.
Make sure to get all the answers whether you are getting business term loan or business credit line. Everything should be transparent. That said, the utmost aim of any loan for small business is that the business will grow and not to lose money. So, you have to make sure to provide correct answers to all the questions asked by the financing companies when acquiring the credit line or term loan for your business.
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