A loan and a line of credit are two separate ways for businesses to borrow money from banks and non-traditional bank lenders. If you’re like many business owners, you may be wondering when to use each type of borrowing method. At LendSpark, we’re all about helping our customers achieve the correct financing solutions for their current situations. Below, our team breaks down the differences between a loan and a line of credit.
A commercial loan is a debt-based funding arrangement between a business and financial institution. It is typically a fixed term, with fixed payments, and used to fund business expenses, such as payroll, purchase materials, fund growth or purchase equipment. Most commercial loans are short term, however, lenders like LendSpark can renew or “roll” the loan on a regular basis to extend the life of the loan.
Personal loans are perfect if you’re needing operational funds to hire new employees, purchase materials for a new contract, finance equipment, or if your business is growing rapidly and you need working capital. Commercial loans offer business owners a fixed amount of money at funding, a fixed payment over a fixed term. Some real-life examples of using loans include:
Paying Off High-Cost Debt or Consolidating Debt
Businesses borrow for a variety of reasons and many business owners find themselves with credit card debt, cash advances, or a combination of debt. Business loans can help consolidate high-cost debt into one fixed payment.
As companies grow, or if a business has a seasonal need to hire employees, a commercial loan can help mitigate the cost associated with bringing on a training new staff.
Some businesses require a commercial loan to fund new inventory, purchase raw materials, or finance equipment. A fixed payment loan can assist such business owners with this purchase and help them finance the cost over a fixed period of time.
What is a Line of Credit?
A commercial line of credit is a pre-approved amount of money issued by a bank to a business. These lines of credit can be revolving, or based on a fixed term, and act similarly to a credit card. First, the borrower obtains a defined credit limit. Then, as the company “draws” on the approved credit limit, the borrower is required to make monthly payments that include both a principal and interest component to pay down the line. However, unlike a loan, which is a one-time funding amount, the borrower gets ongoing and repeated access to the line of credit while it is operational. With the line of credit, there can be special rates and access that the borrower can get and most of the time, these credit lines are offered by the bank that controls the businesses deposit accounts.
It’s important to note that, depending on the situation, you may be able to use funds from a credit line in numerous ways. For example, you could use a line of credit to write checks, use a card linked to the account, or request a transfer to your checking account. Even though the line provides you with access to funds up to a particular level, you will not be charged interest until you officially draw from the available funds.
If you expect to have a cash shortage at the end of the month and don’t have a savings account to fall back on, a line of credit can help you get through this challenging period. If your customers are slow in paying your bills or have not paid due to questions on your invoices, you still need access to working capital to pay your recurring expenses.
Payroll costs happen on a regular basis, whether that is weekly, bi-weekly, or monthly. Whether your clients are paying their bill on time, or you have savings, payroll is the one expense that always needs to be paid. A commercial line of credit can help smooth out the ups and downs in cash flow and help you cover your payroll expenses.
You have just been awarded a new contract with a new client, which requires labor, materials, and expenses to produce the product or service before you can invoice the client and be paid. Having access to a commercial line of credit will again assist you during such a situation.
Entrepreneurs, freelancers, or new business owners who have seasonal cash flow fluctuations can apply for a line of credit. Because a line of credit may be used several times, borrowers can utilize it to cover unexpected needs during the off-season and create a payment plan when their back in action.
Contact LendSpark Today
Still unsure about which option is the best for you and your unique situation? We’re here to help. Contact our team today so that together, we can build a solution that works best for you.