Lines of Credit Versus Loans: Small Businesses
Loans or Lines of Credit: What is better for your business?
When you own a small business, finding the right type of financing is the key to growth. There are many options available today, but the two most common options are: business loans and business lines of credit.
Answer these questions before selecting the best way to finance your business:
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What is the purpose of the loan?
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How much money do you need?
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When do you need the money?
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How long will it take you to return it?
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How long have you been in business?
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what is your credit score?
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What are your current finances (personal and business) like?
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If you need collateral, do you have any to repay the loan?
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Do you have a business plan?
You may want to gather some materials beforehand and make sure you have a solid business plan. Some of the items you may need to include are:
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Executive Summary
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Company’s description
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Industry Overview
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Organization description/business overview
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Description of products and services
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Request for funds
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Funding projection for the next 3-5 years
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Financial statements and assumptions
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Credit history (business/business owner)
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Summary of any investor or any other affiliation
You should understand the differences, as well as the advantages and disadvantages of each, and you should have a clear understanding of why you need to borrow money.
A business loan (BL) is when you borrow a substantial sum of money for specific business purposes. The sum is paid to you in one go and you must repay it within a specified period of time.
An SBA Guarantee is where banks and other lending institutions offer many Small Business Administration (SBA) loan programs to help small businesses. The SBA does not make loans, but rather guarantees loans made to small businesses by private and other institutions.
A line of credit (LOC) is like your personal line of credit, just like credit cards. This allows you to withdraw funds up to a predetermined amount and pay monthly payments and pay interest charges on the outstanding balance.
Let’s see the differences, advantages and disadvantages of each one:
1. Moment: When you apply for a loan or line of credit, you need to know when you are going to use it. A loan is something you get when you need it and for specific purposes. By contrast, a line of credit is usually set up before you need it and can serve multiple purposes.
2. Monthly payments: With a loan, your monthly payments start immediately and don’t change from month to month, whether you’re using all the money or not. With a line of credit, your payments only reflect the amount of money you’ve borrowed, and you only make payments on the amount you’ve borrowed.
3. Renewals: Business loans do not renew at the end of the terms, you must reapply. Although a credit loan is revolving, you can use it several times.
4. Long term vs. short term: Loans are generally paid off in 2 to 6 years. Lines of credit can solve short-term problems.
5. Interest rates: With a business loan, you will likely have higher fixed interest rates, while a line of credit may offer lower variable rates. With a line of credit, if you miss a payment or go over your credit limit, your interest rates will increase.
With such a wide range of financing options available to small business owners, it can be difficult to choose the right one. But, knowing the difference between two of the most common financing solutions can help you get a bigger picture of what you’re really looking for. You want to make the best decisions so that money works for your business.