The difference between lines of credit and loans

Do you understand the difference between a line of credit and a term loan? Both provide funding for your business, but the terms are quite different.

A term loan meets a specific need that your business has. Such a loan is for a specific dollar amount and has a predetermined schedule of monthly principal and interest payments. The loan rates are usually fixed, but can be variable. The loan may have to be paid off in one year or even 10 years, and amortization periods may range from one year to 25 years, depending on the purpose of the loan and the nature of the collateral.

Term loans can be used for working capital; purchasing or refinancing commercial real estate that your business will occupy or use as an investment; large equipment or commercial vehicle purchases; business debt refinance or consolidate; or to acquire another business.

A business line of credit is a great way to have flexibility in your financing. With a revolving line of credit, you are pre-authorized to borrow up to a specified amount, secured by business assets. You only borrow as much as you need via the line of credit. This means you can access it whenever you need funding. You only accrue interest on what you have borrowed from the line, and you aren’t penalized for paying down the principal balance to reduce interest.

A line of credit can be used for cash flow, payroll, purchasing inventory, financing accounts receivable or even unplanned events and expenses. Your collateral can include accounts receivable, inventory or equipment – subject to limitations. If certain credit conditions are met, an unsecured credit line may be available.

Ready to discuss these funding options with our Business Lending Team? Simply call us at 801-478-2300.