Editor's choice: First Down Funding business loans
- No prepayment penalties
- Competitive rates
- Works with bad credit and most industries
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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.
Get a fixed-term business loan with predictable monthly payments Term Loan
Term loans and lines of credit are both types of financing that you can use to help your business cover expenses and grow.
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.
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.
Term loans are often best for large, one-time purchases or specific purposes. You might want to use a term loan for:
Lines of credit are usually better for covering smaller, short-term expenses that are difficult to predict. These include:
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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