Which Is Better For Your Business: A Loan or a Line Of Credit

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.

Conclusion

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.

How to Get Started With Making Your First Loan Payments after You Graduate?

Taking out a loan is a great way to get the funds that you need to make expensive purchases, pay for medical procedures, to renovate your home, and the money can even be used to pay your taxes or pay for college. Over the years, lenders have come up with dozens of types of loans, in order to cater to the needs of different types of individuals. One of the most popular types of loans currently in use is the one meant to pay for a college education.

College loans are for many the only way to pay for their tuition, and a large number of lenders have included them in their offer, competing by offering better interest rates or smaller monthly payment systems. Regardless of which lender you borrow from, all individuals usually get a grace period of six months to get a job, figure out a monthly budget, and start making the monthly payments on the loan.

It all sounds very simple, however, as most college graduates find out, it is difficult to find a job, find a place to live, create a functional budget, and keep track of the monthly payments that you have to make on your loan. This having been said, figuring things out and starting to make your first loan payments isn’t impossible, provided that you know a few important tips. Here is how you can start to make the payments on your loan:

Know who your loan service is

The loan servicer is, for all intents and purposes, the company that collects the monthly payments that you make and manages your student loan. This company is tasked with sending you a payment notice one month before the first due date. However, this is a formality and may sometimes be skipped. If you have taken a federal student loan and have not yet been contacted by the loan service, you will have to start doing research on your own.

Where to find information about your student loan

The easiest way to figure out when your first due date is and how much you have to pay is by checking your borrowing history at the National Student Loan System website. The platform contains a list of all your federal student loans, along with how much you own and the loan servicers for each of them. You can use the website to contact them if they have not yet reached out to you and make sure that you have all the information needed to repay the money.

This having been said, if you have taken out a student loan from a private bank or lender, you will not be able to use this platform. Instead, you must contact each of the lenders that you have borrowed money from and ask for information regarding how and when you must make the monthly payments.

Know what your options are

When contacting the lenders, inquire about what repayment plan you are enrolled in. Most companies will default to a 10-year repayment plan which is, incidentally, also the most affordable overall. However, if you cannot make those payments, you can also switch to other plans that are easier to deal with. In most cases, the new plan will be based on your monthly income, making it easier for you to create a monthly budget.

If you have taken out a federal student loan, you will be able to calculate the alternative payments using the repayment estimator tool found on the Education Department’s online platform.

By opting for an alternative payment plan, you will make smaller payments, but it will take longer to repay all the money that you’ve borrowed. This may be more expensive in the long run due to the additional payments that will also carry interest.

You should also ask your employer if he is willing to offer any assistance. There are currently thousands of companies that offer help with the student loans that their young employees have to pay. These businesses often recruit their personnel directly from university campuses. Functionally speaking, the companies that are part of these help programs offer an additional $100-$200 to the employees who have student loans, in order to make it easier for them to make their payments.

Is the interest that you pay on student loans deductible?

Yes, it is. However, this depends on how much money you’re making. Generally speaking, you can deduct up to $2,500 in interest on any federal or private college loan that you’ve taken out on your tax returns, as long as you qualify. It is also important to mention that the deductions do not need to be itemized.

Is it a good idea to refinance college loans?

If you have taken out a federal loan, it will come with consumer protections that are designed to help you. Refinancing them is usually a bad idea. However, if you’ve taken out a private loan and you find that you can get a better deal by refinancing it, this may help you in the long run.

Conclusion

Overall, if you’ve just graduated from college, you should immediately get in touch with your loan service company and ask how much breathing time you have. Next, see if your employer offers any help to graduates that have to pay off student loans. Lastly, look for alternative payment plans that can make it easier to budget your income. Also, don’t forget to deduct the interest that you pay on the loan.

If you find that you either cannot make the monthly payments or that you can get a better deal through a different type of loan, refinancing your college loan is a possibility, but it is important to keep in mind that the debt will still have to be paid, and the longer time it takes you to repay the whole amount, the more it will restrict your financial possibilities.