Discover the differences between a line of credit and a term loan.
Are you considering a credit product to improve your business? If your answer is yes, you must know the differences between a line of credit and a business term loan. Each one helps you differently.
|Line of creditGranted primarily to finance accounts receivable or accounts payable. This option helps close the gap between collecting from customers and paying suppliers.
|Term loanGranted for longer than one year. It is used to finance assets that support the business, such as the investment in equipment, property, vehicles and improvements to the business sites. There is also a permanent working capital loan, a monetary injection through debt granted to stabilize business finances or to provide a boost to continue operating or improving.|
Both the line of credit and the term loan are useful tools to help establish or provide continuity to a business. Of course, if businesspeople do not receive good advice in this area and use these tools for the wrong purposes, it could result in destabilization of the natural cycle of their business finances. For example, an increase in the line of credit could be unfavorable for the business because it could result in an increase of the monthly payment for the line of credit. In addition, 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 this case, it is advisable to grant a term loan to reduce the balance of the line of credit and to re-evaluate its limit.
Experts in this field suggest that the balance of the line of credit should be reduced to zero at least once a year to prevent an increase in the total debt of the business. The increase of the debt of a business, in turn, increases the interest rate of loans and could have a negative effect in the cash flow of the business.
The good news is that bank officers are your best partners, since they provide accurate orientation to help you achieve success. As financial advisors, bank officers have the ability to see the bigger picture of a situation and based in their experience, make recommendations. Want to learn more? Check out popular.com/en/business today!