Your business needs money.
You are renovating your office and need additional funds to complete the project.
Should you take out a loan or a line of credit? Which one is better? How much can you borrow?
Keep reading to see the benefits and drawbacks of the line of credit vs loan.
Line of Credit vs Loan: Business Line of Credit
A business line of credit is known as revolving credit. This means that you have a balance that accumulates interest. If you don’t use the line of credit, you will not have to make any payments.
There are a few benefits of a business line of credit.
Having the ability to use the money you may not have in a time of need is a huge benefit for a business. Whether you need to make some quick repairs or capitalize on a specific opportunity, you have the cash available on reserve to do so. We offer a simple application and approval process that allows you to apply from anywhere.
Similar to a personal credit line, opening a business line of credit helps to build your business credit history. Paying your credit bill on time will help to boost your credit score. The credit score will affect how much of a line of credit you receive and dictate any increases in that amount for the future.
Balances Cash Flow
Most businesses go through periods of high and low cash flow. Having a line of credit helps to even out your business in those low periods. Covering certain expenses with the line of credit could prevent your business from taking out a loan.
When you are consistently borrowing from your line of credit and paying it back, you begin to build a strong relationship with your lender. This is an advantage because there will be a history of trust already if you need to take out a business loan or need financial assistance in the future. Like any business relationship, it is important to hold up your end of the agreement.
There are a few drawbacks to a business line of credit.
Charges & Fees
While it may seem simple to open a business line of credit and pay as you borrow, it can come with hidden costs. Doing extensive research about annual fees and service charges for each lender you are considering working with is very important. Knowing all of their rules prior to borrowing is key to not getting charged extra.
Risk of Misuse
A business line of credit should be used when there are gaps in cash-flow within your business. Think of it as insurance to protect your business from running out of cash. Using the credit to spend more cash than your business can pay back is where the risk lies.
Line of Credit vs Loan: Business Loan
A business line is known as installment credit. This means you receive a set amount of money and must make monthly payments on it. This begins immediately, regardless if you use the loan right away.
There are a few benefits of a business loan.
Grow Your Business
Cash is necessary for your business to grow. Taking out a business loan can give you the cash needed to fund a new project or upgrade a certain area of your business. If these changes lead to increased revenue, the loan is a very profitable choice.
The interest on business loans is tax-deductible. Fixed-rate loans have an interest rate that stays the same for every month. This allows your business to plan for monthly loan payments without being surprised at the interest amount.
Builds Business Credit
Taking out a business loan and repaying it over time will help to build your business credit. Your business will be in a better financial position for the future when it has a history of demonstrating your ability to repay any funds that you borrow.
There are a few drawbacks to a business loan.
Secured Against Assets
Business loans are often secured by a business asset to ensure that your business will pay the full loan amount back. If your business fails to do so, the asset can be seized by the lender as a result. Most businesses think they will be able to pay it back but this is important to keep in mind if something happens and you are not able to repay the loan.
Difficult To Qualify
Depending on the lender, business loans can be difficult to qualify for. We offer business loans to all industries but require you to be in business for at least six months and have $5,000 in monthly revenue. We are happy to work with you on a different option if you do not currently meet those requirements.
Due to having a monthly loan payment, you may be limited in the cash that could be used in other areas of your business. You would need to take out another loan in order to have access to additional cash and have another loan payment as a result. If you are not sure how much money you will need, estimating the amount will be important.
Contact Us Today
Please contact us today to start a discussion about whether a line of credit vs loan would work best for your business. We are happy to answer all of your questions and provide direction in this process.