Business Line Of Credit Rates Vs. Term Loan Rates: Which Is More Cost-Effective?
When you’re looking at financing options for your business, you will be met with various loan types. Typically, businesses either apply for a term loan or a business line of credit, depending on their needs. When choosing the right option for you, it is generally wise to compare the business line of credit rates with term loan rates.
Understanding the difference between these financing options is vital before you decide to apply for either one. With this in mind, we’ll explore the differences between the business lines of credit and term loans below.
Keep reading so you can choose the right option for your business and ensure its financial health.
Business Line Of Credit Vs. Term Loan
Both a business line of credit and a term loan may be excellent funding options that can help a business secure funds and grow financially. However, there are some significant differences between these two financing options.
To start with, a business line of credit is a revolving credit, which means you may borrow funds whenever needed up to your credit limit. With a revolving capital, you can withdraw as many times as needed for as long as you repay the amount borrowed.
Business lines of credit are generally easy to apply and get approved for. You may get one through a bank, credit union, or online lenders.
After you apply, lenders review your business’s creditworthiness and get you approved if you meet their lending criteria. Once approved, you may withdraw funds whenever you need them as long as you don’t go over the agreed-upon credit limit.
On the other hand, a term loan refers to a traditional form of financing with which you gain access to a fixed amount with a fixed repayment schedule. It could be long-term or short-term.
Both work generally the same, except with the repayment periods varying. With a term loan, you get the funds in a lump sum that you repay over the agreed-upon period.
Purpose And Usage
Another significant difference between lines of credit and term loans is their usage and purpose.
Suppose you’re looking for more flexibility and a steady cash flow to cover short-term expenses, a line of credit might suit you better.
The flexibility of using a line of credit is especially beneficial in managing cash flow. Lines of credit are also an excellent way to build your business’s positive credit score by making timely payments.
However, if you are looking for funds to finance large capital expenditures, expansion projects, or looking to create a solid budgeting plan, term loans could be a more suitable choice.
Business Line Of Credit Vs. Term Loan Interest Rates
When it comes to the interest rates and fees associated with lines of credit and term loans, there are some significant differences. These differences are likely to influence which financing option you apply for.
For instance, business lines of credit could have lower interest rates than other financing options. Typically, with a business line of credit, you will only have to pay interest on the amount you withdraw instead of the entire credit limit.
Generally, interest rates for a business line of credit may vary between secured and unsecured options. Other fees you may expect include annual fees and drawdown fees, which vary from lender to lender.
In contrast, term loans have fixed interest rates. This means that your rate will remain the same throughout your loan term. Fixed interest rates may make it easier to budget and plan expenses monthly. Other associated fees with term loans may include origination fees and prepayment penalties.
If you wonder what your interest rate may be with Lumi, try our business loan calculator.
Repayment Terms
When it comes to repayment terms, lines of credit tend to be more flexible. As we mentioned, when you repay your line of credit, you only repay what you withdraw and the interest rate on the amount used instead of the total credit limit.
Term loan repayment terms may involve weekly or, more typically, fixed monthly payments over a set period. The set period varies based on whether your loan is short-term or long-term.
Short-term loans, as the name suggests, have shorter repayment terms, usually between 3 to 18 months. Long-term loan repayment periods last from 1-5 years.
Which Financing Option Is Suitable For Your?
Ideal Scenarios For A Business Line Of Credit
A business line of credit can be an excellent choice for businesses that deal with seasonal fluctuations in cash flow. This means periods of high demand and revenue followed by slower periods. With a business line of credit, you will be able to manage your business’s expenses during these slower periods.
Ideal Scenarios For A Term Loan
If you are looking to finance a major investment or expansion, it may be better to apply for a term loan. These are situations where the stability and predictability of a term loan are preferable. Expenses in these situations may include real estate acquisitions, purchasing equipment, etc.
Hybrid Approaches
There is also a possibility of using both financing options simultaneously or sequentially, depending on your business needs. Of course, this depends on your ability to qualify for both a line of credit and a term loan at the same time.
If you do qualify for both, you may utilise the term loan for long-term investments while using the line of credit for short-term expenses. This approach generally ensures all business expenses are covered.
Conclusion
Overall, the business line of credit rates differ from those of term loans, which is why it’s crucial to consider your business needs before applying for a suitable financing option.
If you’re looking for more flexible usage and terms, a line of credit could be a better choice. However, if you need a set or larger amount without any surprises when it comes to repayments, you may want to consider a term loan with fixed interest rates.
If you’re looking for more information on Business Line Of Credit and Small Business Loan options, visit the Lumi website or contact us by phone at 1300 005 864, or email sales@lumi.com.au.
At Lumi, we offer the best Business Line Of Credit awarded by WeMoney Awards 2024. This flexible, revolving financing option provides ultimate flexibility with no ongoing fees, making it a more cost-effective finance solution for small business owners.
