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Know Your Options: Business Loans vs. Lines of Credit

Whether your business is a few years old or has been around for generations, having access to additional capital may be essential to its next stage of growth. Smart financing will be key.

While there are many different business funding options available to small and midsize businesses, there are two main financing types to choose from: a term loan or line of credit.

The best option will depend on your specific needs. Maybe you need funds to manage seasonal business fluctuations. Maybe you want to modernize your facility or invest in new equipment or vehicles.

To choose between a business or commercial loan vs. a line of credit, consider whether you’re planning for a single expense or a series of expenditures over time. You’ll also need to consider how much you’ll need to borrow and whether you anticipate needing quick access to cash to support day-to-day operations.

Best for Long-Term Plans: Business Term Loan

A term loan is a one-time financing option that works best for larger investments. Use this type of loan for your expansion needs, such as building a new office, renovating an existing facility, or purchasing equipment.

What you should know:

  • Approval is easier for established businesses.
  • Your lender will specify that loan proceeds must be used only for the proposed and approved purpose.
  • Flexible terms can accommodate your monthly cash flow, with competitive fixed or variable rates available.
  • There are upfront closing costs and fixed payments for the specified amortization period. Repayment terms vary. Royal offers fully amortized business loans, not balloon loans. This is an important differentiator and may make a major difference to your business finances.
  • Your business’s revenue and credit rating will determine the rate, term, and loan amount you are offered.

Best for Flexibility: Business Line of Credit

A line of credit is revolving credit that can provide working capital and support short-term borrowing needs like purchasing extra inventory or meeting payroll, and it can be an important solution to cash flow fluctuations.

What you should know:

  • A business line of credit can provide a financial cushion, but make sure you secure your credit line now, so you’ll have it when you need it.
  • You can tap your line of credit multiple times for ongoing operating expenses.
  • When it’s time to repay the principal and interest, you only pay interest on the amount you borrowed, not the full credit line. Additional credit becomes available as the balance is paid off.
  • Business lines of credit have minimal closing costs compared to term loans, but variable interest rates could affect your borrowing costs.

Also, if long-term investments are tying up your line of credit, it may be time to consider a term loan.

One Final Thought

Business loans and lines of credit come in all shapes and sizes, and so do lenders. When seeking business funding, it’s a good idea to turn to a local lender with a long track record of serving businesses like yours. Along with having a dependable local relationship, you’ll benefit from the expertise of a lender that understands you and your market, and you may enjoy more flexible borrowing requirements and faster turnaround times than you’d find at a larger institution.

Learn more about Royal Credit Union’s business and commercial lending solutions, then connect with your local business lender to discuss your needs.

This information is for general informational purposes only and does not constitute tax, legal, or business advice. Business and commercial loans are subject to credit review and approval.