It takes money to make money, and that's why small businesses often need a helping hand from a lender. The question is: should you seek a loan or a business line of credit? It depends on your goals.

Term Loan vs. Business Line of Credit

If you need a large, lump sum to enable you to make a significant purchase, such as real estate or a business acquisition, you'll most likely need to seek a term loan. If you need the money for more general purposes, a business line of credit may be your best option. A credit line can help you with short-term financial needs and can serve as a backup plan when cash flow isn't where you'd like it to be. Here are some pros and cons of both options.

Term Loan

Term loans can be either long-term or short-term. A long-term loan is what you'll need for that real estate purchase, but a short-term loan might be a better option if you anticipate being able to pay the loan back relatively soon. In general, a term loan not only helps you buy real estate, but it can help you acquire another business, purchase inventory or equipment, or refinance existing debt.

Pros

On the positive side, a term loan is a great way to get a large amount of money for something your business needs or something that you believe can significantly increase its success. You can even get a good rate. If your credit is in good standing and you meet all eligibility requirements, you can secure a fixed, low rate that you'll be happy with. On top of that, you'll have a monthly payment that is predictable and won't add any unexpected stresses to your life.

Another advantage of a term loan is that it can actually help you build your business credit, which can help you with other loans or credit lines down the road, assuming that you are responsible and keep up with regular payments.

Cons

For most term loans, your company will need a solid credit score, which may be a challenge for a smaller company or a start-up. Approval may also depend on collateral. This can include buildings, equipment, accounts receivable, or even inventory. A fixed loan payment adds to your monthly expenses, regardless of whether you’re making a little or a lot of money that month, so know what's at stake before you apply.

Business Line of Credit

A business line of credit allows you to finance the needs of your business with some flexibility. You're able to draw on funds as needed, with a variety of options, including: secured, unsecured, revolving, etc., depending on your specific needs. Repayments are also flexible. Credit availability is replenished with each repayment, giving you control over your credit line.

Pros

That flexibility is probably the greatest advantage of a business line of credit. It's there whenever you need it. If your cash flow has taken a dip, an advance from the credit line can help you keep going until the crisis is over. If unexpected expenses come up, it can provide a lifeline.  

As a business owner, you can also have some control over the amount you borrow, how much you spend, and what your payment plan looks like.

Cons

Because a line of credit can be an easy way to get funds to cover shortfalls, it may be tempting to use those funds as a way to camouflage serious issues. If you find yourself continually drawing on your credit line without the ability to pay back the advances, it may be time to rethink your business plan. A credit line is a great tool to have at your disposal, but responsibility is the name of the game.

Ultimately, your business will most likely need to borrow some money at some point, especially if growth is a goal. Other credit options include: SBA loans, equipment leasing, factoring/business credit solutions, and agricultural financing. One of these might work best for the needs of your business. Know your options and discuss the various forms of financing with your business banker before making a decision.

 

The information provided is presented for general informational purposes only and does not constitute tax, legal or business advice. Any views expressed in this article may not necessarily be those of Nevada State Bank, a division of ZB, N.A.