A Business Loan vs. Line of Credit: Which Option is Right for You?

August 22, 2019

When it’s time to raise cash to manage and grow a business, most entrepreneurs think of the traditional term loan structure: Apply, get approved, receive loan money as a lump sum, begin repayment of that money right away.

A line of credit is similar to a term loan except that it offers a different way to access your approved cash amount and repay balances. Under certain circumstances, a line of credit could be a better option for business owners. When weighing the benefits between a line of credit and a term loan, whether for your personal finances or business, it is important to understand the differences between these two financing options.

The number one perk offered by lines of credit is the access to funds as you need them, which can be critical to the success of a business. Having access to money to use and repay repeatedly without reapplying can come in handy when looking at big building projects or hiring sprees down the line — saving you the hassle of seeking extra cash flow when costs pop up.

Next, consider that interest on a business loan begins to accrue on the full loan balance immediately and requires fixed payments over a set period of time. However, the interest on a line of credit doesn’t begin until you withdraw funds, and is only charged on the outstanding balance.

So what’s the catch? Many people find it difficult to qualify for a line of credit without an impeccable credit history. If your credit score is weak, you may have a better chance qualifying for a term business loan (but lower scores usually mean higher interest rates).

Term business loans afford other benefits, like limiting what you are able to borrow to the amount you need right now. These loans also provide the predictability of regular monthly payments, which are easier to plan for in your budget.

Remember, no matter which option you choose, debt can build quickly with loans or lines of credit if you only make the minimum required payments and let the interest grow. Before considering any financing options, confirm what level of monthly payment you can handle.

 

Want to know the options available for your business?
Print and complete our commercial business loan application
then set up an appointment to meet with a commercial loan officer by visiting any
Texas Gulf Bank location or Contact Us via e-mail/phone.

 

All Loans Subject to Credit Approval.