Whether you’re in need of start-up funds for a new business, capital to expand a current company, or money to get you through the next quarter, knowing the difference between business loans and business lines of credit is key.
Typically used to finance the purchase of a major asset, business loans allow you to add long-lasting value to your company. Lines of credit, on the other hand, are usually used to meet operating expenses in times of inadequate cash flow or to cover immediate expansion costs. While both provide much-needed financial support, there are advantages and disadvantages to each that you need to be aware of.
Establishing the purpose of your loan and determining what the money will be used for will help guide you in deciding the appropriate means of financing. Here’s what you should consider before you get started.
Long-Term vs. Short-Term
As mentioned previously, business loans are most commonly used to invest in major assets or long-term commitments. Lines of credit, on the other hand, are primarily used for short-term purposes – financing expenses such as marketing, payrolls, or unexpected cash-flow shortages. While lines of credit are helpful in dealing with cash-flow issues, we ultimately advise that you primarily use your line of credit for revenue-generating activities.
With both financing options, you have required payments; however, the difference is the timeframe in which these are made. Loan payments begin right away and typically do not fluctuate in amount, regardless of how much of the money you are using. Because these purchases may require a larger sum of money, loans are paid off over a longer time period – typically 2-6 years. With a line of credit, you are only required to make payments on the amount of money you’ve borrowed – so if your balance is zero at the end of the month, so is your payment.
Business loans typically have higher, fixed interest rates, while lines of credit have lower, variable rates. Simply put, if you have trouble managing your credit – making late payments or going over your credit limit – you might be better off applying for a loan. Because interest rates and standards are constantly changing, it is best to speak with an investment professional if you have any questions about how these factors will affect your financial decisions.
The timing of when you apply for a loan versus a line of credit is dependent upon why you need the money. If you need the funds for one specific purpose, a loan is more useful and can be applied for at that given time. Unlike a loan, a line of credit is usually obtained before you critically need it and can be used for multiple reasons.
For more insight and assistance in deciding the best financing option for your business, contact us at Symmetrical!