Small business owners apply for small business loans when they are bounded by financial constraints. They prefer to put their best foot in the market to leave an impact on the customers. From covering the cost of day-to-day tasks and paying their employees to finance and launching an engaging advertising and marketing campaign, a manager has to divide the funds for every task. Throughout these chains of events, running out of funds is not a strange incident! Traditional and alternative lenders are offering term loans, business lines of credit, merchant cash advances, equipment financing, and invoice factoring to those stuck in the vicious loop of financial glitches.
Most small business owners apply for either a term loan or a line of credit. The primary feature of both of these loans is to fund small businesses so that they can cover the mandatory expenses. So how does a line of credit differ from a term loan? The first difference lies in the manner of getting access to the loan and the second difference lies in the repayment method of the loan. Before we dove in and explored the difference in details, let us take a brief overview of both of the loans that are under our microscope.
What is a term loan?
In technical terms, a term loan is a lump sum of money lent by the lender to the borrower, and the borrower pays it back as per the weekly, monthly, or daily repayments schedule.
For example, if you need a million to start and run a company, then you apply for a term loan from the bank. The bank offers you a lump sum of money, and you sign the document saying you will make the repayment over ten years. You have to make the payment including the interest rate.
It is a fair deal; the borrower gets the money, and the lender knows that the borrower will make the payment according to the repayment schedule.
What is a line of credit?
If you are an avid credit card user, then it will easier for you to understand the mechanics of a line of credit. When you apply for a line of credit, the lender transfers the money into the borrower’s account. At the hour of need, the borrower withdraws the money and after paying interest on the amount that he or she withdrew, the borrower’s account recharges to its original amount.
For example, you apply for a line of credit to cover the cost of an event. Since you didn’t know the exact money you need, so you apply for revolving credit. The lender offers you $20,000 and you spent $5,000 to rent the chairs and tables, decorate the whole place, and to purchase food ingredients. After paying interest and $5,000, your account will recharge on its original amount.
After having a brief idea of a business line of credit and a term loan, let us explore the differences between the eligibility criteria, repayment terms, and interest rates of lines of credit and term loans.
If you have been running a small business for more than two years, have a credit score of more than 640 and annual revenue of $100,000, then you are eligible for a term loan.
On the other hand, if you have been running a small business for two years, have a credit score of 620, and your business is generating an annual revenue of $75,000, then you are eligible for a business line of credit.
No one knows the financial worth of your business more than you, so assess your financial standings and apply for a loan.
The repayment term of a business line of credit ranges from six months to 5 years. It might vary depending on the nature of your business and the terms of the lender.
On the other hand, the repayment term of a term loan can be up to ten years. Furthermore, they are divided into a short-term and long-term loan. If it is hard for you to keep up with the longer repayment terms, then apply for a short term loan.
The interest rate on a business line of credit ranged from 7% to 25%; it might vary depending on the market rate and your creditworthiness.
On the other hand, the interest rate on a term loan is 20%.
We have given you the three major differences. Decide after analyzing your cash flow. Making repayment on time can be challenging as it is something that you can’t escape. Pay special attention to the repayment terms and interest rate of your preferred funding option.
When is a term loan better funding option?
When a borrower is certain about the total loan amount, he or she should apply for a term loan. In addition to this, for business owners who function better with a set repayment cost, a term loan is an ideal option.
So if you think your company is generating enough revenue to follow the repayment schedule over the years, apply right away and kiss your financial worries goodbye.
When a business line of credit a better funding option?
When a borrower is uncertain of his or her financial needs, applying for a business line of credit is a safer option. At times, you need funds instantly, on occasions like these a line of credit can be beneficial.
Lastly, if you think your business has a stellar financial position so apply for a line of credit. A good credit score means a lower interest rate and flexible payment terms.
Evaluate your financial needs, before applying for a term loan or a business line of credit. If you have made a decision, then head over to our website, apply for the most suitable small business loan, and get rid of all the financial glitches. For more ideas and funding options, you can follow us on Twitter (@Onlinecheck) and Facebook (@Onlinecheck). If you have any question, feel free to call us on our toll-free number at (833) 827-4412, our loyal and keen financial advisor will answer your every question and guide you throughout the way.