Loans for business

Which is better for your business: a term loan or line of credit?

As a business owner, you know capital is essential to finance short- and long-term growth. But you may be debating which investment vehicle is right for your needs. In what situation should you apply for either a term loan or a line of credit?

Term loan

A term loan is a one-time financing vehicle that works best for long-term investments. Use this type of loan for your expansion needs, such as building a new office, renovating an existing facility or purchasing equipment.

With a term loan:

  • Approval is easier for established businesses.
  • The bank will specify the only use is for the proposed and approved purpose.
  • Flexible terms will accommodate repayment needs and there are competitive fixed or variable rates.
  • There can be upfront closing costs and the payments for the loan are based on the collateral and amortization period.
  • The bank looks at income, cash reserves, credit rating and type of collateral to determine the interest rate, length of the term and the loan amount.

Line of credit

A line of credit is revolving credit that can provide working capital and meet your short-term borrowing needs. It is ideal for your day-to-day operations, like purchasing extra inventory or meeting payroll.

With a line of credit:

  • Get approval before you need it to provide a cushion of cash.
  • Tap into it multiple times for any ongoing operating expenses.
  • Pay interest only on the amount you borrow.
  • Credit will become available again as the loan is repaid.
  • Interest rates and closing costs are determined by credit rating and type of collateral.

These financing options can provide the capital you need to run and grow your business. Whether you’re looking for business capital to help you improve your short-term cash flow or to finance longer-term debt, your business banker can help you find the right loan for your needs. And remember, if long-term investments are tying up your line of credit, it may be time for a term loan.

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