A line of credit gives you the flexibility to take out funds when needed and repay them along the way. Similar to a credit card, a credit line allows you to borrow up to a certain amount and then pay back and “re-borrow” from the line until the term expires, after which you will have a designated amount of time to pay off the debt.
One advantage of credit lines is that they allow you to borrow only the amount of money your company needs when your company needs it, so you don’t get stuck paying unnecessary interest charges on unnecessary funds.
Lines of credit are designed to serve a company’s short-term financial needs. While not appropriate for financing fixed assets, they work well to fund expenses your company pays for over time.
Term loans, on the other hand, provide you with a fixed amount of cash that can be used for any legitimate business need, such as operating capital or purchasing real estate or equipment. Loans must be repaid, generally with interest, over a fairly short period of time.
Term loans are beneficial in that they deliver capital now. Your company repays the loan in pre-arranged monthly installments over a defined period of time, and you can repay the loan ahead of schedule without penalty. The downside of term loans, however, is that the lender usually charges fixed interest on the amount borrowed -- interest you continue to pay even after the loan has been paid down considerably. Keep in mind though that term loans usually come with lower interest rates because they're collateralized.
The decision between a loan and a line of credit often comes down to whether you want to make a specific purchase or whether you need to have funds on hand for ongoing expenses and/or unexpected problems. Your banker can help you decide which type of financing best suits your business’s needs.
Let Zions Bank’s Business Resource Center assist you with your business needs. Call us for a free appointment at 801-594-8245. We are open Monday through Friday from 9 a.m. to 5 p.m. Beth Holbrook can be reached at email@example.com.