Term Loans Vs. Lines Of Credit: Which Is Better?


Whether you’re looking for capital to run your small business or are seeking to expand your operations, you’ll likely be looking at two options for financing. While a term loan or lines of credit may appear attractive to you, making the right choice will depend on your specific business needs. To resolve this choice, you’ll need to know how each option is beneficial, as well as drawbacks from both.

Term Loans are basically sums of cash that are paid back in fixed, equal installments. These payments are made at fixed interest rates, so you will know going in how much interest you will have to pay. Typically, these payments are made monthly. A term loan is better if you’re planning on a long-term investment in your company. Examples include if you are seeking to purchase business equipment, carry out a construction project, or add facilities.

If you need to meet short-term expenses such as meeting payroll, purchasing supplies or filling inventory, taking out a line of credit will be a better option. Lines of credit allow you to borrow money within a certain limit. You don’t have to borrow the money all at once. You can borrow in various amounts, provided you don’t exceed the limit. Also, while you will have to make minimum payments per month, you will not be required to make fixed payments as you would with term loans. You can be more flexible in how you pay off your debt.

When considering your options, you should think about the risks.  With term loans, lenders are taking a chance that they may not be paid back. Some lenders may require you put up collateral to secure a loan. You may receive smaller interest rates as a result, but if you are unable to meet your payments, you will lose the collateral. Likewise, using a line of credit may be risky if you’re using the money to pay off bigger investments. You could hit your borrowing limit and not have money available in a crunch. You may also incur added interest rates if you are late with a payment or spend over your borrowing limit.

Choosing between a term loan or a line of credit depends on the needs of your business. A term loan is helpful to finance business expansions that will be complete at a set date or for one-time purchases, while lines of credit work better to meet day-to-day expenses such as payroll or buying more stock. Consider these benefits while choosing your financing.