Building and operating a small business comes with specific challenges, and among the most significant challenges are choosing the best financing options and managing finances. If you require funding to grow your small business, you have various options available to you, the most common being a standard term loan and a business line of credit. Find out about each option’s key features and specific scenarios when you might need a term loan or business line of credit.
What Exactly is a Term Loan?
This is basically a loan with a particular amount that comes with a predetermined repayment schedule as well as a floating or fixed interest rate. Small businesses usually use this money for monthly operations or buy fixed assets like equipment for their business operations.
When Should You Opt for a Term Loan?
The following are scenarios where a small business could benefit from a term loan:
- Your computer systems badly need an upgrade and you have a 40+ workforce. Let’s say that the average service life of these systems is three years, give or take, so you can take out a 3-year term loan.
- You require new equipment to expand your restaurant business. This substantial shift in expansion and positioning would take you some time to repay everything, but since you could use the kitchen equipment for 10 years or so, you’ll have the time to extend your repayment term for say, 10 years.
- If you’re planning on investing in one-time big-time purchases such as new facilities or capital-intensive technologies, you might benefit from a term loan.
What Exactly is a Business Line of Credit?
A business line of credit, likewise known as LOC, is essentially an arrangement between you and a lender that determines the maximum amount of cash you can maintain or access. You will be able to access the money from your business line of credit in Utah any time you wish, provided that you don’t go over the predetermined amount of credit your lender extended to you and that you satisfy all lender requirements.
When Should You Opt for a Business Line of Credit?
Below are scenarios where a business line of credit makes the most sense:
- Let’s say you sell various items on in your e-commerce store and one or two of them are selling out quicker than you expected. Your supplier is offering you an excellent price on the items but on a COD basis. You could utilize funds from your line of credit to purchase these items.
- You’ve just finished a couple of projects and are expecting your receivables next week. But you have to pay several of your loyal employees before you receive your receivables and you don’t have money on-hand. In this instance, you could use your line of credit for the payroll and then repay it once you receive your receivables.
The main thing to remember is that depending on whether your small business needs a small or big infusion of funds, you should go with the funding option that suits your requirements best. And prior to signing on the dotted line, make certain that you have read and fully understand all the features and terms of each funding option