Term Loan vs Line of Credit | What’s Best for my Business

Small businesses require financing to meet various needs ranging from purchasing assets, managing cash flow, or clearing other debts. While there are many financing options, the most commonly used are term loans and line of credit. 

Term loans are conventional small business loans that have a fixed repayment term, and the interest rate is charged on the entire amount borrowed. A small business line of credit is a type of loan where money can be borrowed from a creditor and is similar to credit card loans. 

Determining which type of loan is ideal for your business depends on many factors that include:

Interest Rates

Conventional small business term loans have an average interest rate between 4 and 6 percent. The interest has to be paid on the entire amount borrowed. Interest rates can vary across lenders while competitive rates are also offered by Small Business Administration (SBA), Interest rates also vary based on the type of loan applied for. 

In a small business line of credit, interest is paid only on the funds borrowed and not on the credit limit. It is possible to find a line of credit for low-interest rates with a reputed small business line of credit lender. Building up your credit history and explaining why you require this type of financing can help the lender find the best financing option and deals for your small business.

Flexibility

A line of credit is the type of small business financing that Alberta companies who are not eligible for government financing plans and conventional loan products opt for. 

A small business line of credit acts as a rainy day fund and offers more flexibility than a traditional loan. It provides timely financial support when the business is looking to leverage an opportunity to grow.  Line of credit for small business also offers attractive rates as compared to business credit cards and unsecured loans. 

Collateral

Banks require specific collaterals for approving small business term loans. If you intend to purchase an asset such as real estate or a piece of equipment, these will be used as collaterals against the loan.

Small business line of credit lenders also requests collateral for the loan. This can be your inventory or funds in the business account. There is no collateral needed for an unsecured line of credit, however you will need a strong track record and good credit history. The interest rates are typically higher with unsecured loans.

Which Type of Loan is Best for Your Business?

While a line of credit has many advantages for small businesses, it is important to note that the factors that can affect your eligibility include your business performance, credit history and the lender or bank.

A term loan is ideal for borrowers who can meet the criteria set by banks. Traditional term loans are also suited for making high-cost, specific purchases that add value over a period of time to the business.

However, if you are looking to manage your business cash flow, a small business line of credit is a more suitable and flexible option. Keep in mind that the funds that are offered in a small business line of credit are proportionate to your business revenue. There is only a set amount of funds that you can get based on your business history.

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