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Line of Credit vs Term Loan

Cash is the lifeblood of business. Having sufficient cash available when you need it is essential. Lack of cash at critical points in the business cycle is the number one cause of business failure.

When is the best time to apply for credit? The best time is when you don’t need it. So apply now while you have cash flow and can show that you are a thriving business worth investing in.

There are two main ways to acquire credit for your business. One is a line of credit and the other is a term loan.

It’s important to know which is best for your business.

So let’s take a look at each.


Business Line of credit.

A line of credit is negotiated with your financial institution. It’s a bit like a credit card. It has a limit, you can borrow when you need it and you can pay back some or all of it at any time.

The real advantage of a line of credit is that it is revolving. You use some or all of it, you pay it back, and you use it again and pay it back. It’s always available for you to use up to the limit.

Lines of credit are advantageous for businesses that have peaks and valleys in their cash flow.

Lines of credit tend to have higher interest rates and fees. However, you only pay when you use it and only on the amount you use.

Lines of credit are not usually secured with inventory or collateral.


Term Loan.

Term loans from lending institutions can be tailored to your individual business needs.

When approved for a term loan, the entire amount is made available to you in one lump sum. You must immediately start making payments and are charged interest on the full amount of the term loan.

When the term loan is paid off, then you must apply for a new loan.

Term loans work best when used for long-term capital investments – like equipment.

Term loans are easier to get for young people building their credit history. Interest rates are set based on loan rates when you borrow.


For further details go to: Business Management • May 04, 2016 by Meredith Wood

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