Line of Credit vs. Term Loan: What Are the Main Differences and Which One to Choose for Your Business?

When you’re running a small business, you’re sometimes going to find yourself in a position where you need to spend some money in order to make some. While researching what options are available to you, you’ll probably have come across two of the most popular forms of credit.

These are known as ‘line of credit’ or ‘term loans.’ These two forms of credit are very different, and when organizing the capital for your business, it’s very important that you pick the right one.

Today, we’re going to explore the differences of each and detail what each product is about. This will give you all the information you need to choose which type of capital is most beneficial to your business.

What is a Line of Credit?

A line of credit is quite simply the name given to a type of business loan that resembles a personal line in the form of a credit card or home equity loan. What makes a line of credit so appealing to businesses is the fact that you can receive the funds in one lump sum payment.

You have access to all the funds at all times and can dip into them whenever you need them. What’s more, you won’t need to make any repayment whatsoever until you actually spend some of the credit. These loans can come in both secured and unsecured variations.

A line of credit is a great way to provide yourself with continuous credit that can extend into the future. Even if you’ve used all the credit and paid it off down to $0, you can then use it again without having to reapply if you need it.

What is a Term Loan?

With a term loan, this is again a lump sum of credit that you can access at any time. There are both secured and unsecured versions and come with variable interest rates and repayment amounts, depending on the provider of your loan.

How a term loan differs from a line of credit is the fact that you need to start paying your loan off the month after you receive it into your bank account. You’ll then pay off the loan month by month until your credit balance reaches $0, and the loan will be closed.  If you require more money, you will need to reapply for a new loan from scratch.

Which is Best for You?

When it comes to interest rates, lines of credit tend to have lower interest rates and closing fees than a term loan does. However, lines of credit tend to be stricter. For example, if you miss a payment, your interest rates can shoot up to extortionate levels.

This is why lines of credit are most suitable for smaller, shorter investments. You can quickly spend a bit of money you need and pay it off just as quickly, ensuring your business can tick over without financial issue.

On the other hand, a loan can be a great idea if you’re looking to invest in something bigger and more long-term, all thanks to its fixed rates and average 20-year repayment plans.

Conclusion

The type of credit your small businesses needs will completely depend on how you plan to use it. While we’ve provided you with an outline on what’s best for what situation, it’s always a good idea to research available credit providers in your area. For quick access to credit, you can apply at www.unsecuredfinanceaustralia.com.au.

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