Entrepreneurs often consider the contest between a line of credit and a business loan as an unending one, but if carefully observed from a ‘needs’ perspective, you’ll realize choices are a lot easier to make. Before we dive too deep, let’s establish the most relevant factors that differentiate a business loan from a line of credit.
1. Time and Cause.
A business loan is taken once and it covers as far as it is intended, while the line of credit can be taken multiple times. Regarding cause; an impulsive immediate need prompts you to go seek a business loan while a consistent need is managed by lines of credit.
With the business line of credit, you may not be subject to a monthly payment, so long you do not withdraw from the reservoir. However, with a business loan, you are liable to monthly charges even if you do not withdraw any amounts from the loan.
Business loans are therefore more useful for long term use in which they could be identified as a debt for up to about 2 to 10 years. The lines of credit, on the other hand, serve to take care of immediate needs such as marketing, facility purchase and offsetting other debt. This makes LOC the appropriate fix for a sudden shortage of cash.
3. Interest Rate
A business loan often comes with a fixed interest which accumulates, whether or not you use the loan. But, the lines of credit come with a low-cost variable interest rate which only counts when you use or withdraw from the pool.
It should be noted also that if a borrower defaults on a LOC, he gets charged higher rates which could surpass that of business loans.
Now let’s highlight circumstances where you should choose a line of credit over a traditional loan.
If you need a flexible repayment pattern.
A line of credit is as flexible as anything can be in the finance community. You are not required to pay a particular amount at a particular period, except if you actively withdraw from the credit line. The only cause for surcharges is if you cross the credit line or you repay a lower the minimum acceptable amount. In Direct contrast, traditional loans are too rigid to exhibit features like this, in fact, you start paying parts of the sum requested immediately after it is granted to you.
If You Don’t Have A Defined Budget
If the project you are embarking on, does not allow for a clear forecast, a line of credit will work just fine. All you have to do is request a particular amount and leave it standing in the credits account until your project needs it. On the other hand, the lack of a defined budget is a big loophole for Business loans. This because if you take an excess you’ll be paying for the excess you take, even if it is not useful for you.
When You Have a High Credit Score
A high credit score is like a safety net for borrowers in the loans community.
First, it guarantees your acceptability and reliability, then it makes sure your liable interest is as low as possible. A high credit score is also a plus for business loans, but it doesn’t adjust the interest rate. Here, it only assures your lending partner of your ability to pay them back.
If You Are Unsure Of the Span of Spending
There are certain phases of business with undefined spending limits, they cannot be effectively controlled. Take a data security issue for examples or a legal case. You don’t know how long it will take or to what extent you’re spending would be dragged. Having an active line of credit in this situation could be life-saving. A business loan will not be applicable here because your needs may get wrapped up anytime and your debt continues counting. Or worse off your loan value does not cover the extended period of spending you are faced with. Which could be very detrimental to business growth, because until you can pay up such debts, it might bar you from being considered for further cash advances.
It is noteworthy that a business loan also serves in capacities that lines of credit can’t, and as the pacesetter of the subject, traditional loans can’t be cast aside. However, to keep borrowers safe from financial restrictions, augmentations like LOC have thus been established. It would be pretty helpful to further inquire from local borrowers who are under the influence of a same or similar environment as you.