Differences between a line of credit and a term loan.
Are you thinking about choosing a credit product for your business? If so, let us provide you with some orientation on the differences between a business term loan and a line of credit. Each product will help you in different ways. That’s why it’s important to talk to your banking officer so you can choose the one that truly meets your financing needs.
Lines of Credit tied to business deposit accounts1
The FlexiLínea and B-Smart line of credit automatically protect your account in case your checking section is overdrawn. They are usually approved for the purpose of covering accounts receivable, inventory, and/or operating expenses of the business.
This is a financing plan for a set term, usually longer than one year. In business, it is used to finance assets that will support your business operations, such as, for example, improvements to facilities or purchasing equipment, property or vehicles. These products are available to help you start or expand your business.
A term loan can be described as an injection of money to stabilize a business’ finances or to give it a boost so it can keep operating or expanding.
Identify the tool that’s right for you
Be sure that the payment terms are in line with your business’ cash flow and be prepared to offer a guarantee that is related to the purpose of the loan or line of credit, whichever you choose.
Both a line of credit and a term loan are products that can help you establish and provide continuity to a business. Of course if you, as the business owner, do not get the proper guidance and you use these tools for the wrong purposes, you could destabilize the natural cycle of your business’ finances.
For example, requesting an increase in a line of credit may be disadvantageous for the business because it would increase the monthly payment on the line. Additionally, the cost or interest rate of a line of credit is generally higher than for a term loan, just as the interest rate for a credit card is higher than for a personal loan. In that case, it is advisable to take out a term loan to reduce the balance on the line of credit and re-evaluate your limit.
Meanwhile, finance experts recommend that at least once a year you reduce the balance on the line of credit to zero to avoid adding to the business’ debt. This avoids the negative effects on your company caused by the increased debt and the resulting increase in interest on loans.
When considering these scenarios, don’t forget that your banking officer is your best partner for making your business succeed. As a financial advisor, the banking officer sees “the big picture” of your situation and can make both long-term and short-term recommendations for your business. Listen and maintain good communications with your banking officer so that together you can choose the right credit product and have a greater chance of winning.
Success awaits you. Learn more about all that we can offer you. Visit today at popular.com/negocios
1Subject to credit approval.