There are several good reasons for why debt financing is a strong option for your business, as it can be a contributor towards the growth of your business, enabling you to take on new and exciting projects.
However, not all debt is the same, and it is important to determine whether a line of credit or a term loan suits your strategic business needs.
A Business Line of Credit:
- Flexible borrowing, similar to a credit card
- Pay after use of credit
- Variable interest rate
- Best for operational purposes, such as payroll, or routine, inexpensive purchases
Example: You own a roofing company, and have recently completed various jobs across the region. You have a high amount of receivables, but employee payroll is in four days and you don’t have the cash on hand due to the receivables gap. A line of credit can bridge this gap and allow you to complete payroll at a low-interest rate.
A Term Loan:
- Fixed interest rate for a single loan
- Lump sum paid out
- Monthly payments begin immediately
- Best for financing large capital purchases, major projects, or refinancing debt
Example: You own a successful restaurant that is fully reserved every night. You decide to accommodate the growing demand, by opening a second location on the other side of town – a massive capital investment. You can cover some of the cost, but need long-term debt financing for this project. A term loan would extend as monthly payments at a fixed rate over the course of your expansion. With all term loans, interest rates are fixed and later you may receive a new rate if you apply again based on the lender’s risk assessment.
It is important to note that, with a term loan, you have to consider whether you will seek out a secured (commercial) loan from a bank, or an unsecured loan. Commercial bank loans have low-interest rates, but are very selective in approval rates and take a long time to process. Unsecured loans have higher interest rates, but fast access to capital. Companies such as Lending Loop bridge the gap by providing fair interest rates and fast access to capital.