When it comes to growing or sustaining your business, outside help is often needed to provide the required cash. Traditional lenders offer two helpful products for business owners: business loans and business lines of credit. Each has its own distinct merits for developing companies. Here’s what you need to know about them before making a decision:
With business loans, a borrower receives one lump sum of money at the outset of the loan and will never receive more for the duration of the loan. With a line of credit, however, a borrower can draw out funds on an as-needed basis during the loan’s term. A line of credit works much more like a credit card account, allowing the business owner to borrow as desired as long as she does not go over the total loan limit.
Business loans without collateral generally must be paid off within five years. The payments are typically fixed and consistent from month to month. A line of credit can have a term length of up to 10 years. Usually, there is a clause that allows the bank to call at least annually, which could require the borrower to pay off the remaining balances.
The interest rate on a business loan is usually fixed and can be higher than the initial rate on a line of credit. Line of credit interest rates tends to be variable and can adjust higher as time goes by. The rates can also be raised if payments are not made on time. Business loans with fixed rates cannot suffer the same fate.
Closing Costs and Fees
As with any bank loan, a business loan will require closing costs in the form of credit fees, appraisal fees if there is collateral, loan processing fees and other charges. A business line of credit will have to require a processing fee at the outset of the loan, but will not typically cost as much as a traditional loan to set up. Lines of credit may have transaction fees though which are charged every time a draw is made.
After weighing the needs of your business and learning the differences between these two financing options, one should present itself as the right option for your capital requirements.