Compare business term loans vs lines of credit | finder.com

Business term loan vs. line of credit: Which is right for your business?

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Choose the best type of financing to give your business the financial boost it needs.

The most important thing to consider when finding financing for your small business is choosing the type that will best suits your business’s needs. Here, we take a look at the two main options: a term loan and a line of credit.

LoanBuilder, A PayPal Service Business Loans

Our top pick: LoanBuilder, A PayPal Service

Customizable business loans with no hidden fees.

  • Min. Amount: $5,000
  • Max. Amount: $500,000
  • One-time fixed fee charged over the life of the loan
  • Acclaimed customer service
  • Requirements: $100,000+ annual revenue, 1+ years in business, 600+ personal credit score

    Top three advantages of business term loans and lines of credit

    Term Loan

    Line of Credit

    • Fixed or variable rate of interest
    • No fixed repayment requirements
    • Flexible repayment plans
    • Option to increase the maximum credit limit
    • Discounted rates
    • Withdrawals can be made at any time

    First, what are term loans and and lines of credit?

    Term loans and lines of credit are both types of financing that you can use to help your business cover expenses and grow.

    Term loan

    Term loans come in lump sums that you repay over a fixed period of time plus interest and fees. Once you spend all the available funds, you’ll need to apply for a new loan if you need more financing. Many business loans are secured, in that they require some form of collateral — often equipment, real estate or a lien on your assets.

    Line of credit

    Business lines of credit are often compared to credit cards: You get access to a certain amount of funds which you can draw from as you need. With a business line of credit, you only pay interest on money that you use. You’ll typically have to repay the amount you draw over a set period of time, after which you can renew your credit line.

    What are benefits of term loans vs. lines of credit?

    Term loans

    • Fixed or variable rate of interest. Many lenders will let you choose between a loan with a set interest rate and one that fluctuates with the market rate. Variable rates tend to start lower but could increase over the term of the loan.
    • Flexible repayment plans. Some loans offer multiple repayment options to choose exactly how much you pay back and when. You could pay your loan back with monthly installments, weekly installments or daily payments.
    • Discounted rates. In return for paying interest on a sizable loan, lenders regularly offer discounts for things like setting up automatic payments.

    Lines of credit

    • Only pay interest what you draw. Rather than having to repay a lump sum, you have the freedom to spend only what you need and pay interest on that amount.
    • Option to renew. While lines of credit come with terms, they’re easily renewable. Many businesses have lines of credit with a lender for years, which they continually renew.
    • Make withdrawals any time. You’re able to withdraw up to a daily or card limit at any time, making it a convenient option for business owners who have ongoing expenses or want to be prepared for large unexpected expenses.

    What are the drawbacks?

    Term loans

    • Can’t help with cash flow. Term loans aren’t great for covering unexpected gaps in your cash flow, since you’ll typically have to calculate exactly how much you need to borrow when you apply.
    • Inflexible. With a term loan, repayments start immediately and you’re on the hook for the amount you borrow, even if you don’t end up using all of it.
    • It takes effort to get more financing. If you still need funds, you’ll have to go through the application process all over again, rather than just renewing your loan.

    Lines of credit

    • Not great for large purchases. While it’s possible to max out your credit limit on a new piece of equipment, you won’t have any other funds available to cover expenses until you’ve paid it off.
    • Unpredictable repayments. Your monthly repayments go up each time you draw from your credit line. If you don’t know how much you’re going to be drawing, it can be difficult to calculate a budget for loan repayments.
    • Draw fees. Some lenders charge you a fee every time you want to draw funds from your credit line— usually around $25.

    What types of costs can I cover with term loans and lines of credit?

    Term loan

    Term loans are often best for large, one-time purchases or specific purposes. You might want to use a term loan for:

    • Equipment
    • Real estate
    • Vehicles
    • Business acquisition

    Compare business term loans

    Line of credit

    Lines of credit are usually better for covering smaller, short-term expenses that are difficult to predict. These include:

    • Overhead costs during an off season
    • Restocking inventory
    • Payroll
    • Emergency expenses

    Compare business lines of credit

    Compare top business lenders in one place

    Rates last updated December 15th, 2018
    Unfortunately, none of the business loan providers currently offer loans for these criteria.
    Name Product Product Description Min Loan Amount Max. Loan Amount Requirements
    LoanBuilder, A PayPal Service Business Loans
    Customizable loans with no origination fee for business owners in a hurry.
    $5,000
    $500,000
    Annual business revenue of at least $42,000, at least 9 months in business, personal credit score of 550+.
    LendingTree Business Loans
    Multiple business financing options in one place including: small business loans, lines of credit, SBA loans, equipment financing and more.
    Varies by lender and type of financing
    Varies by lender and type of financing
    Varies by lender, but you many require good personal credit, a minimum business age and minimum annual revenue.
    Credibly Business Loans
    Funding to cover business expenses with daily or weekly repayments.
    $5,000
    $250,000
    500+ personal credit score, 6+ months in business, $15,000+ average monthly deposits
    Lendio Business Loan Marketplace
    Submit one simple application to potentially get offers from a network of over 75 legit business lenders.
    $500
    $5,000,000
    Must operate a business in the US or Canada, have a business bank account and have a personal credit score of 560+.
    National Funding Small Business Loans
    Working capital loans and equipment financing, some high-risk industries may be eligible.
    $5,000
    $500,000
    Be in business at least one year and make at least $100,000 in annual sales. Other loan types have additional requirements.
    LendingClub Business Loans
    With loan terms that vary from 1 to 5 years, enjoy fixed monthly payments and no prepayment penalties through this award-winning lender.
    $5,000
    $300,000
    12+ months in business, $50,000+ in annual sales, no bankruptcies or tax liens, at least 20% ownership of the business, fair personal credit score or better
    OnDeck Small Business Loans
    A leading online business lender offering flexible financing at competitive fixed rates.
    $5,000
    $500,000
    500+ personal credit score, 1+ years in business, $100,000+ annual revenue
    Fora Financial Business Loans
    No minimum credit score requirement and early repayment discounts for qualifying borrowers.
    $5,000
    $500,000
    Business age 6+ months. Monthly revenue $12,000+. No open bankruptcies.

    Compare up to 4 providers

    How to get business financing

    The processes involved in finding approval for a term loan are simple. The lender will want historical evidence of successful cash flow and assurance of collateral, should your company be unable to repay the loan.

    The prerequisites for a line of credit are similar but more stringent. Along with a contract of repayment terms, lenders will provide a list of rules that must be kept in order to continue with the line of credit. These rules will usually involve the company maintaining a certain net worth and not dropping below an agreed level of debt.

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