When it comes to obtaining funds for your business, there are dozens of types of loans that you can get, from a very large number of lenders. However, loans are often one-time deals, in the sense that they have a set value and time. Furthermore, they often have high interest rates and strict monthly payments that are difficult to work with in a volatile economy.
Luckily, loans are not the only types of financing that you can access for your business. There is also the option of getting a line of credit that you can use for an extended period of time and only pay for what you borrow.
This having been said, both have advantages and disadvantages. Term loans tend to come with several constraints that need to be taken into consideration, however, lines of credit tend to involve more risk in the long run. The latter can be particularly dangerous if you are unable to repay the money at the end of the agreement.
To make it easier to decide which path you should choose when it comes to your business, we will be looking at what risks each type of financing involves, and we will also discuss a few less orthodox ways to get the money that you need.
How useful are term loans for a business?
Term loans are the types of financing that pretty much everyone knows and has or will use. These are given out by banks to individuals and businesses and have a specific set of restrictions that must be taken into consideration.
First of all, when you take out a term loan, you are essentially borrowing a fixed amount of money, for a fixed period of time. Depending on your agreement with the lender, you may be required to pay either fixed monthly interest or variable interest. The variable one is often a double-edged sword because it can either benefit you or make the loan more expensive, depending on how the state of the US economy.
Returning the money must also be done through monthly payments. Depending on the agreement that you have with the bank, you may be required to make one, two, or even three payments ever month. This may put quite a lot of strain on your business expenses.
The main advantage with these is the fact that you get all the money at once, and also that you may find programs that will allow you to get a lower interest rate. Furthermore, most lenders will offer you unsecured term loans, even for your business, while most lines of credit require that you put up collateral.
Are lines of credit a good alternative?
Lines of credit are often better for companies that are on a tight budget because they can be cheaper in the long run. Think of lines of credit for companies as credit cards that you can only use for business purposes.
Keep in mind that these often have considerably higher interest rates than term loans. This having been said, you are only required to pay interest for what you borrow. For example, if you have a $300,000 line of credit, but only take out $20,000, you will only pay interest for the $20,000.
Furthermore, if you can return the money by the end of the month, you can evade having to pay any interest at all. This means you can theoretically go through the whole duration of the agreement without having to pay almost any interest.
While it may seem that lines of credit are the better choice, even they have certain disadvantages that must be taken into consideration. First of all, getting a line of credit can be very difficult if your business has no financial history to show the creditors that they will have something to gain from giving you the money.
Online lending services are growing in popularity
Most entrepreneurs default to going to banks when it comes to taking out loans or lines of credit because they can always be trusted and they offer complete bureaucratic transparency. However, there are other ways to get the funds that you need.
Online-based companies that offer term loans and lines of credit are also useful and heavily regulated by the government, so they’re safe. These have slightly larger interest rates than banks, but they are a good option if you’re looking for a loan for a startup or if the banks do not want to let you borrow money.
Overall, term loans are the better choice if you can get great terms and a low interest rate, preferably a fixed one. You’ll get all the money at once and you return it over the course of several years, in monthly installments.
On the other hand, if you just need a backup fund for your company, a line of credit should work great. These allow you to borrow large amounts of money and you only have to pay interest for the credit that you use.