Businesses need financing from time to time to take care of the purchase of inventory, paying salaries, or to take advantage of an opportunity that has come up, like to service an emergency order and for other expenses. Fortunately, businesses have many options these days for financing their business needs including the traditional loans and the recent option of online lenders. The challenge now is to choose the option that best suits business’s needs and from the lender with the best terms. This article examines two financing options: term loans and lines of credit, to help you know when to use which.
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Term loans explained
Term loans are the most common types of loans which involve being lent lump sums of money to be repaid over an agreed period with payments made monthly, bimonthly, weekly, or even daily. The loans are lent at an agreed interest rate and the full amount is released right away and starts accruing interest immediately. These loans are usually for a specific purpose, for instance purchasing a motor vehicle, buying a house, paying higher education fees (student loans), and so on. They can be secured against an asset or at times may be unsecured.
Understanding lines of credit
Lines of credit are a type of revolving financing, almost similar to credit cards, and borrowers are granted access to a certain amount of credit which they can draw on as they may need and only pay interest on the amount taken out against them. They are not meant for specific purposes and borrowers can use them on different things without the lenders’ approval. Payments are flexible since the borrowing dates and dates of purchase and amounts are uncertain. Due to the uncertainty, lines of credit have higher interest rates and borrowing standards, for example, most are required to be secured.
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To qualify for any of these credit financings, borrowers need to show that they are creditworthy and will repay the amount lent. The credit score is the measure of a borrower’s creditworthiness, so if it’s low, they may not get their credit application approved or will be charged higher interest rates. However, all is not gloomy for those with poor credit ratings as they can work with credit repair experts who can help them to get tradelines for sale to help boost their low credit scores.
Choosing the best option for your business
The issue of which of the two options is best for your business depends on how you intend to use the money. If you want financing for a specific purpose and can tell how much you need, a term loan is better. Conversely, if you need to have some capital at your reach just in case of an emergency, you should go for lines of credit.
Term loans are suitable if:
Ø You need a lump sum
Ø You want to spread your loan repayment over a long time
Ø You are sure of the exact amount you need for a certain purpose
Ø You have no access to credit and need money quickly
Lines of credit will work for you if:
Ø You want a financial fall back plan when unforeseen expenses arise
Ø You expect to have many small expenses over a long period
Ø You want quick access to cash when you need it
Ø You want a revolving (reusable) source of funding
The right option for your business between term loans and lines of credit depends significantly on the types and amount of expenses your business will have. Other factors that may also influence the best option include how you want to repay and if you know the exact amount you need for a particular purpose.