The Difference between Term Loans and Lines of Credit
This post about The Difference between Term Loans vs Lines of Credit, here you will find about features of term loans and lines of credit and which is right for your business.
Whether you run a retail store stand or a large corporation, there often comes a time when your business needs funding to grow, bridge cash flow gaps or stay ahead of the competition. For small business owners, there are numerous options for financing. In the age of Fintech and digital banking, there is more available now than there was 10 years ago, from your traditional local banks to new online alternative lenders.
With so many choices, it is always challenging and time-consuming to find the right funding options for your business. Below, we'll take a look at the two most sought-after small business financing options: terms loans vs. Lines of credit.
terms loans vs. Lines of credit
A term loan usually offers funding in a lump sum of capital that borrowers have to pay back over a specific time period with an interest rate, which might be fixed or variable. With a term loan, your repayment will start from the moment you secure financing, and these payments will be on a set schedule, anywhere from daily and weekly to bi-monthly and monthly.
A line of credit works similar to a credit card. It is one of the most flexible small business financing products in the market today. With a line of credit, the lender will extend you a certain amount of credit from which you can draw against any time and for any business purpose. This loan is an example of revolving credit, meaning if you pay your debt, your original credit limit becomes available again and you can draw against it when you want.
Features of Term Loans and Lines Of Credit
While flexible capital, lenders, and short-term options are some of the common things between term loans and lines of credit, these small business loans do have many different things.
Uses: Term loans are best for specific business expenses such as opening a new location, purchasing equipment, refinancing existing debt while lines of credit are best for an ongoing operating expense such as bills, payrolls, and seasonal expenses.
Interest Rate: The interest rate for term loans can be anywhere from 8% to 30% while for lines of credit from 7% to 25%.
Loan Amount: It can range from $25,000 to $500,000 for term loans and $10,000 to over $1 million for lines of credit.
Terms: The maximum tenure is up to 5 years for both term loans and lines of credit.
Qualification Requirements: The common requirements to qualify for:
Lines Of Credit
Fees: Prepayment penalties, origination fees, packaging fees, and more may apply with term loans while inactivity fees, draw fees, withdrawal minimums and more may apply with lines of credit.
Which is Right for Your Business?
If you've made it this far, you're probably wondering which small business financing option can make more sense for your business needs.
If you need working capital quickly for your day-to-day business operations, securing a line of credit through an online alternative lender could be your best solution. This small business financing option has an easy and fast application and once approved, allows you to receive funds in as little as 24-48 hours. Besides, if you want a reusable source of funding and access to cash when you need it, you should go for a line of credit.
However, if you're looking for a big amount of funds to finance particular, one-time business expenses, term loans might be your perfect option. Moreover, if you need money quickly and want a lot of time to repay the amount, applying for a term loan is the smartest idea.
While these are two very different small business financing solutions, both term loans and lines of credit are great funding options to run and grow your business. You can use an online lending marketplace to find and compare a variety of term loan and line of credit offers, sold by multiple lenders, so you can choose one the best fit your business' current financial requirements.
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ABOUT THE AUTHOR
Jack Bauer is the author of this post, he is an sr. content writer, he writes on various topics on business, technology, finance, etc. He loves to share his knowledge and experience regarding small business financing through blogs and articles.