Choosing the right type of financing for your business is crucial. Two common options are fixed term loans and lines of credit. A fixed term loan gives you a lump sum of money to be repaid with interest over a set period, while a line of credit offers ongoing access to funds that you can draw from as needed. Understanding the differences between these two options will help you decide which one fits your financial needs.
Understanding your financial needs
To determine whether a fixed term loan or a line of credit is the right choice, start by assessing your financial goals and requirements. Consider why you need financing, when you’ll need the funds, how much you can afford to repay regularly, and what type of financing you are eligible for.
Don’t forget! Your credit score, financial situation, and overall business health will influence the type of financing you can secure. Make sure to compare your options so you can find the terms that work for your business.
Benefits of a fixed term loan
A fixed term loan is ideal if you need a large amount of money upfront for specific projects or purchases, such as buying equipment or expanding your business. One of the main advantages is predictable payments. Because you’ll have a set repayment schedule, it’ll be easier to budget and manage your finances.
Additionally, if you have a lower credit score, a term loan might be easier to qualify for than a line of credit. The interest rate on a term loan is generally fixed, which provides stability in repayment costs over time. This type of loan is suitable if you prefer a structured repayment plan and need funds for a large, one-time expense.
Benefits of a line of credit
A line of credit offers flexibility by allowing you to access funds as needed, up to a certain limit. This option is perfect for covering short-term expenses or managing cash flow fluctuations. You only pay interest on the amount of money you actually use, which can save you money if you don’t need the full amount. Repayment is flexible; you can repay and reuse the funds, making it ideal for ongoing expenses or unexpected emergencies.
Immediate access to funds is another key benefit, as a line of credit can help you cover unexpected costs or take advantage of short-term opportunities. They’re best for businesses that need a steady stream of funds to manage day-to-day operations or bridge temporary cash flow gaps.
How to decide
When deciding between a fixed term loan and a line of credit, consider your specific needs. A term loan is best when you have a clear idea of how much money you need and a specific plan for repayment. It’s commonly used for purchasing inventory in bulk, buying equipment or technology, expanding or renovating space, or investing in long-term projects.
A line of credit is a better choice if you need flexible access to funds for short-term or recurring expenses. It’s ideal for managing cash flow during seasonal fluctuations, covering emergency repairs, or purchasing inventory as needed.
The bottom line
Choosing between a fixed term loan and a line of credit depends on your business needs and financial situation. A term loan is more suitable for large, one-time investments. A line of credit offers flexibility, which is ideal for managing short-term or unexpected expenses. Consider both your financial situation and long-term goals to help you decide which option supports your business best.
Need the best of both worlds? Consider combining a fixed term loan with a line of credit for dual financing. This approach provides the stability of a fixed term loan for major projects, alongside the flexibility of a line of credit for day-to-day operations and unexpected costs.
Dual financing allows you to cover all bases, ensuring your business is prepared for every opportunity and challenge. Reach a dedicated lending advisor at 855.704.7458 to learn more about how dual financing can support your business.