Finding financial support for your business can be a hard task. Especially when you’re just starting out and even more with poor credit. Though it may be hard, when you need to raise capital for your business, there are still a number of options available.
Not everyone can use cash to pay for needed equipment or fund their expansion into a new location. The two most common options for small businesses are loans and lines of credit. However, each has its pros and cons. In the debate between lines of credit vs loans, which would be better as support for your business?
Support For Your Business – Should You Choose A Line of Credit or Loan?
Starting up your business can be a great experience. However, you still need a way to fund your business. When you are looking for support for your business venture, it’s imperative to figure out whether a business line of credit or a loan would be better for you. Here are some benefits and disadvantages to both.
The Benefits of a Small Business Loan
Business loans have fixed terms. You know the amount you have to pay each month and how many months the payments must be paid. In some cases, you can pay only the interest, lowering the payment but leaving the principal amount untouched.
The main benefits here are:
Just make sure you don’t accidentally sign up for a loan with a balloon payment at the end.
If approved, you get all of the money upfront. This gives you the full amount to pay for everything from equipment to real estate. You don’t have to worry about any delays getting the equivalent to a cash advance from your line of credit.
The Disadvantages of a Small Business Loan
Getting a business loan with a low-interest rate will often require the security of some type if you don’t have good credit. If the business loan isn’t secured by something, the loan term is generally five years. A longer loan term and lower interest rate will be allowed if the loan is secured by your home.
The downside is this:
- your home or business is at risk if you can’t make the payments
- if you don’t have capital, your odds of being rejected go up substantially.
Small business lenders often take their time approving loans and still reject around 80 percent of them. However, alternative options like Advanced Point Capital could allow you to be pre-approved for a line of credit or loan even if you don’t have the kind of business credit history most major banks look for. You can check them out by signing up here.
The Benefits of a Line of Credit
The line of credit is similar to a credit card.
- withdraw as much money as you want up to the credit limit.
- access the money whenever you want.
- avoid making payments if you haven’t withdrawn the money.
This flexibility allows you to pay for what you need when you need it.
If you do need to make payments, the amount is flexible as long as you pay the minimum payment. There is no prepayment penalty, and you can pay the whole amount off if you’d like.
Lines of credit are generally not collateralized. This means a line of credit does not use an asset to secure the loan. More importantly, you can use the line of credit to cover a cash shortfall or pay the bills while waiting for the customer to pay you. The use of money isn’t restricted in any way.
The Disadvantages of a Line of Credit
The interest rates on a line of credit can be variable. These interest rates could change monthly or bimonthly. That creates unpredictability about what you’ll have to pay each month. However, the lender will almost certainly require you to start making payments on the loan balance thirty days after your first withdrawal against the line of credit. Banks may charge you a fee for every withdrawal from the line of credit.
Line of Credit or Loan – What’s Best For You?
Lines of credit are flexible and tend to come with low monthly payments. Loans give you the cash upfront and come with predictable payments. The one that’s right for you is the one that fits your budget and needs the best. Just do your research so that you can make an informed decision.
Are you ready to decide on which financing option is best for you?
AUTHOR LaTia Longuemire
My name is LaTia Longuemire. I enjoy writing, singing, and cooking in my spare time. My passion is helping others. At this stage in my lifetime, I'm primarily focused on my children. They are everything that keeps my world spinning.