The Difference Between Business Term Loans and Business Line of Credit
Cash flow is the most important component in every business, and not having enough of it can be debilitating for any company, including yours. Clearly, it’s best to not wait until your business runs out of cash. When small business owners are strapped for money, fortunately, they can tap into financial institutions and apply for small business loans. Two of the most popular choices include business term loans and a business line of credit.
Both financing options share similar features:
- They can inject ash into your business.
- Borrowers need to repay the loan with interest.
Both solutions focus on solving different financial problems. But how do these two funding options differ from one another? Here’s how:
What is a Business Term Loan?
There are different types of business term loans but all of them have a few similarities. If you qualify for a term loan, lenders will give you a single lump sum, which you then can repay over a specified period. The repayment period is usually within three months to 10 years, depending on the type of term loan.
Related: How to Choose the Best Type of Business Term Loan for You
What is a Business Line of Credit?
A business line of credit functions similar to a credit card where lenders assign you a predetermined credit limit, where you can withdraw funds from as needed. Unlike term loans, you don’t have to pay for the entire credit limit. Instead, you only repay the amount you’ve withdrawn, plus interest.
For example, if you were given a $50,000 credit limit but you’ve only withdrawn $20,000, you only have to repay the $20,000 along with the accrued interest. Because of its flexibility, business owners apply for a business line of credit so they are able to access additional capital anytime.
How Do Business Line of Credit and Term Loans Differ?
Here’s how both financing options differ from one another:
1. Term Loans are Often Easier to Qualify For
With the rise of alternative and online lenders, qualifying for a loan is not as difficult as it once was, as long as your business is generally healthy. Business lines of credit aren’t difficult to obtain, but make sure you’re applying for funding from alternative lenders. Otherwise, you’ll face stringent qualifications from traditional lenders.
2. Term Loans Often Have Longer Repayment Periods
Business term loans (except for short-term loans) often have longer repayment periods. Depending on the type of loan you’re applying for, repayment terms can range from five, 10, up to 25 years.
3. Term Loans Offer Better Rates
The APR for multi-year term loans can be either be 6.5% to 15%, while interest rates for business lines of credit range from 7.65% to 23.99%.
4. Business Line of Credit is Revolving
With term loans, you receive a lump sum upfront. If you need additional funding, you’ll need to apply for another term loan. On the other hand, a business line of credit is revolving. Once you repay your dues, your credit limit goes back up again so you don’t have to reapply for another line of credit.
5. A Business Line of Credit is More Convenient
A line of credit allows you to draw money whenever you need to. In this way, you’ll rest easy knowing you don’t have to worry about paying for daily business expenses.
Which Financing Option is Best for Your Business?
The type of financing options suitable for your business depends on your goals and needs as a company. If you need fast funding, it’s best to apply for a line of credit or a short-term loan through an online lender because banks and credit unions can take up to weeks or months for approval and funding. Online lenders can fund a business line of credit within 24 hours and a term loan within three to five days.
If you still don’t know which type of financing option to pursue, a great way to decide is to determine the use of the funds. If you’re planning to use the funds as a safety blanket in case of emergency, a business line of credit is the way to go.
Term loans are best if you’re going to use it for specific business expenses. If you know the cost of the investment, you’ll be able to determine if taking out a loan can positively impact your ROI. Keep in mind that financing can be expensive, especially If you still don’t know which one to choose. If you find yourself in this position, pick the one with the lowest cost. Be sure to talk to potential lenders and discuss APR and fees.