When you’re looking for financing options for your business, you’ll come across a variety of loan types. Typically, businesses will apply for a term loan or a business line of credit, depending on their needs. When choosing the right option for you, it’s often wise to compare business line of credit rates to term loan rates.
Before you decide to apply for one of these financing options, it’s important to understand the differences between them. With that in mind, we’ll explore the differences between a line of credit and a term loan below.
Read on so you can choose the right options for your business and ensure its financial health.
Business Lines of Credit vs. Line of Credit Term Loans
Both business lines of credit and term loans can be great financing options to help a business obtain capital and grow financially. However, there are some significant differences between the two financing options.
First, a A business line of credit is a revolving credit, This means you can borrow money when you need it, up to your credit limit. With revolving funds, you can withdraw it as many times as you need, as long as you repay the amount you borrowed.
Business lines of credit are generally easy to apply for and get approved for. You can get one through a bank, credit union, or online lender.
After you apply, a lender will review your business’s creditworthiness and if you meet their lending criteria, you’ll be approved. Once approved, you can withdraw your funds at any time, as long as you don’t exceed the agreed credit limit.
A term loan, on the other hand, is a traditional form of financing where you get a fixed amount of money through a fixed repayment plan. may be long or short term.
Both work in much the same way, they just have different repayment terms. With a term loan, you get funds as a lump sum and pay them back over an agreed-upon period.
Purpose and use
Another significant difference between a line of credit and a term loan is their use and purpose.
Assuming you’re looking for more flexibility and steady cash flow to cover short-term expenses, a line of credit may be a better fit for you.
Flexibility in using your credit line is Particularly useful for manage cash flow. A line of credit is also a great way to build a good credit score for your business through timely payments.
However, if you are looking for funds to fund a large capital expenditure, expansion project, or want to create a solid budget plan, a term loan may be a more suitable option.
Business Line of Credit vs. Line of Credit Term Loan Rates
There are some significant differences when it comes to the interest rates and fees associated with lines of credit and term loans. These differences may affect which financing option you apply for.
For example, a business line of credit may have a lower interest rate than other financing options. Typically, with a business line of credit, you only pay interest on the amount you draw, not the entire line of credit.
Generally speaking, Interest rates on business lines of credit can vary for secured and unsecured options. Other fees you may expect include annual fees and withdrawal fees, which vary by lender.
In contrast, a term loan has a fixed interest rate. This means your interest rate remains the same throughout the life of your loan. A fixed interest rate makes it easier to budget and plan your expenses each month. Other fees associated with a term loan may include origination fees and prepayment penalties.
If you’re wondering what Lumi’s interest rates are, try our Business loan calculator.
repayment terms
Lines of credit tend to be more flexible in terms of repayment terms. As we mentioned, when you pay back a line of credit, you only pay back the interest rate on the amount you drew and the amount used, rather than the total line of credit.
A term loan repayment term may involve weekly payments or, more commonly, fixed monthly payments over a period of time. The set term will vary depending on whether your loan is short-term or long-term.
Short-term loans, as the name suggests, have shorter repayment periods, usually Between 3 and 18 months. Long-term loan repayment period is 1-5 years.
Which financing option is right for you?
The ideal scenario for a business line of credit
A business line of credit can be Excellent choice Businesses coping with seasonal fluctuations in cash flow. This means that periods of higher demand and income are followed by periods of lower demand and income. With a business line of credit, you’ll be able to manage your business’s expenses during economic slowdowns.
The ideal situation for a term loan
If you are looking for Provide funding for major investment or expansionit may be better to apply for a term loan. In these situations, the stability and predictability of a term loan is preferable. Expenses in these cases may include purchasing real estate, purchasing equipment, etc.
mixed methods
Both financing options may also be available simultaneously or sequentially, depending on your business needs. Of course, this depends on your ability to qualify for both a line of credit and a term loan.
If you meet these two conditions at the same time, You can use a term loan for long-term investments while using a line of credit for short-term expenses. This approach usually ensures that all business expenses are covered.
in conclusion
Overall, the line of business for a credit rate is different from the line of business for a term loan, so it’s important to consider your business needs before applying for the right financing option.
If you’re looking for more flexible usage and terms, a line of credit may be a better option. However, if you need a fixed or larger amount without any surprises when it comes to repayment, you may want to consider a fixed-rate term loan.
If you are looking for more information about business lines of credit and small business loan options, visit Lumi website Or contact us by phone 1300 005 864 or email sales@lumi.com.au.
At Lumi, we offer the Best Business Line of Credit awarded by WeMoney Awards 2024.
If you’re ready to apply, click here.
Disclaimer: We do our best to fact-check all information and keep it up to date, but this cannot always be guaranteed. All information shared is for general purposes only and should not be construed as personalized financial advice. Always consult an accredited financial advisor, accountant and/or tax attorney for personalized advice related to your business or personal finances.
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