Many small business owners looking to use a line of credit as a driver of revenue growth will either turn to a line of credit or term loan. The key question is, which of these borrowing options will best serve the needs of your business?
Choose a term loan for investments. Here’s a simple rule-of-thumb on how to decide between these two types of business loans. If you have a clear picture of how you will you will apply the funds and you can put this plan into motion as soon as the funds are available, consider taking a business term loan. Term loans work best when they are applied to large investments such as equipment, vehicles, and property. If you take out a term loan without a clear idea of how you will apply the funds, you could find yourself paying interests on funds that are not actively generating profits for your business (not a recommended financing strategy).
Choose a line of credit for the unexpected. Businesses often take out lines of credit for the same reasons individuals take out personal credit cards — to cover unanticipated expenses. Let’s say you operate a business with a net 30 repayment cycle. But, you need the funds now in order to cover payroll and other expenses. A business line of credit can help tide you over until your invoices are paid. Other business owners maintain lines of credit in order to cover fluctuations in inventory purchases.
Lines of credit are not designed to cover large, long-term investments. A business that plows through a credit line may have difficulty securing other loans or getting a credit line increase. Keep this in mind when you apply for financing.