by Lorie Schulenberg
When considering your business financing options, you might wonder which is best– a loan or a line of credit. Both can help you meet your financing goals, such as upgrading equipment, raising working capital, financing inventory, or expanding your business. But each have different features and benefits.
With a loan, you borrow a specific amount of money at one time and make regular payments on a set schedule. That means a loan can be a good choice for raising permanent working capital or purchasing equipment.
A business line of credit, on the other hand, resembles a home equity line of credit. Once the line is approved, you can draw funds as needed as long as the line remains open. Your credit availability is continually replenished as you repay balances. That means a line of credit offers flexibility for financing receivables and inventories.
Evaluating your choices – Here are a few issues to discuss with your business banker when deciding between a loan or a line of credit.
Interest rate – With a line of credit, your interest rate will generally fluctuate based on market rates. A loan may also have a variable interest rate, although various SBA (Small Business Administration) lending programs have options for borrowing money at a fixed rate for the life of the loan. Although a line of credit may come with a variable rate, there’s no interest charged if you’re not borrowing against the line (although there may be a small annual fee to keep the line open).
Payments – A traditional term loan offers a predictable repayment schedule, with terms that can extend for up to seven years. The payments on a line of credit will vary depending upon how much you’ve borrowed. A line of credit is generally offered for a specific period of time, although the line may be extended if your credit remains excellent and your business stays profitable.
Funding – With a loan, you receive the entire loan amount once the loan closes. If you need additional funds, you would need to apply for another loan. With the line of credit, you have more flexibility in accessing financing, although you can’t borrow more than the maximum amount approved.
Terms – Business loans come with a wide variety of terms, but in general can’t be cancelled unless you miss payments. A line of credit could be withdrawn, with payments required on the outstanding balance, if there’s a significant change in your business or credit.
Loan or line of credit? Call California Bank & Trust for Answers – As one of the largest banks headquartered in the state, California Bank & Trust specializes in business banking. We help large and small businesses alike meet unique financing needs through a variety of loans and lines of credit.
Whether you need to expand your business, purchase equipment, or finance receivables or inventory, call (951) 719-1242 to arrange a meeting with Lorie Schulenberg, SVP, Branch Manager or visit us online at www.calbanktrust.com.
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