Loan or line: Which funding method is right for your business?
Every business needs cash to either sustain inventory, expand into new markets, purchase equipment or invest in marketing Sometimes that means borrowing money. Here's a look at two popular funding methods and how to pick the right option for your business.
Lines of credit
If you need short-term cash to cover expenses during slow sales periods or to expand your service or product offering, a business line of credit may be the right funding solution. Your ability to obtain a line of credit depends first and foremost on the strength of your business and ability to repay the line. How much credit your business can access varies as do interest rates and terms and conditions for payment amounts, but lines of credit typically start at $10,000.
Businesses that are approved to open a line of credit have the flexibility to determine how much credit to use, when to access it and for what purpose. In addition, many lines of credit allow businesses to determine how aggressively they'll repay the amount borrowed based on their financial needs and their goals for minimizing interest rate charges applied to the money borrowed.
Uses for lines of credit
Most lines of credit are best used for short-term funding needs. As with an extra credit card you keep on hand for emergency needs, having access to a line before you need to use it can help you manage your exposure to unplanned financial emergency or hardship. Typical uses for a line of credit include:
- Covering expenses while waiting to collect accounts receivable
- buying inventory, typically for seasonal increases
- covering off-season operating expenses
- paying for marketing campaigns
- unexpected expenses.
Types of lines of credit
Most business lines of credit are revolving accounts but may be secured or unsecured.
Unsecured lines of credit may not require a business to use assets, but normally the owner will personally guaranty the line. However, most lenders will require a business to have an established credit history and a track record of positive financial performance to qualify.
Secured lines of credit, on the other hand, allow businesses to use short-term assets (such as accounts receivables) or longer-term assets (such as real estate or equipment owned to run the business) as a form of collateral to secure the line.
Term loans specify the amount of time capital is loaned to your business, usually including a fixed repayment schedule. They can range in length anywhere from as short as a year or two up to a decade or more. Some term loans include a fixed interest rate and fixed payment schedule; others include a variable interest rate that may increase over time and change the required loan payment amount.
When your business secures term loans using business assets such as equipment or property as collateral, lenders may require that you limit the debt taken on in the future. In addition, when a term loan is used to finance an equipment purchase, the length often is determined by the useful life of the asset being acquired.
Lenders usually rely on credit and financial history, performance and assets owned — or a combination of all these factors — in the term loan approval process.
Uses for term loans
There are a wide range of situations in which a business might use a term loan, including to pay for:
- new equipment or machinery
- upgrades in technology and office equipment
- business acquisition or expansion
Term loan or line of credit?
A business line of credit is a good source of capital for short-term funding, moderate capital needs or unexpected expenses. But if your business has significant, well-defined financing needs – such as the purchase of another business, investment in expensive business-related equipment or significant capital improvements – a term loan may be the more appropriate choice.
Need working capital to cover short-term costs or fund long-term success? Our bankers can develop a plan that gets your business the funding it needs to grow. To learn more, call (800) 400-6080 to reach the banker nearest you.