Updated: Apr 23, 2020
Business Owners and Entrepreneurs often face the difficult decision of getting a business loan, or line of credit to help start or expand their business. The problem usually lies with choosing the right bank or financial institution, the best interest rates and terms, and finding the best products with no pre-payment penalties. It is no mystery that “money” is the life blood that drives any business, and without it, the business would cease to operate.
What are some things to consider prior to getting a business loan or line of credit? What’s far more important, is carefully examining the advantages and disadvantages of both types of financing, what’s the difference in the two; and then selecting the right one that aligns with your business goals and budget for repayment.
One advantage of getting a business loan, or line of credit is having the ability to use someone else’s money, to turn a profit. The second and most important advantage is having access to cash quickly to meet payroll, restock inventory, or payoff other business expenses. Another advantage is being able to establish or build business or personal credit.
One of the disadvantages of getting a business loan, or line of credit is the repayment of interest, prepayment penalties, and meeting the terms outlined in the contract. Prior to taking out a business loan, or line of credit, be sure to understand your budget and method of repayment. Also consider taking advantage of special promotions, like zero-interest loans or lines of credit for a certain period of time (i.e., interest free for 12 months, or 18 months). Please note that the idea is to repay the loan, or line of credit prior to promotion ending to avoid paying interest.
The Difference Between a Business Loan and Line of Credit?
Business loans are funded with cash deposits or bank wires for the total amount of the loan. Because cash is given, the repayment is based on an amortization schedule and is paid by the borrower monthly until the balance + interest is paid in full. For example: you apply and get approved for a $50,000 loan for a period or term of 5 years or 60 months, at an interest rate of 8% per year. This means that the total interest you’ll pay is $10,829.18, so the total amount you will pay is $60,829.18, or $1,013.82 per month.
Business lines of credit are like credit cards in that, it is repaid based on the amount of credit used. For example, you apply and get approved for a line of credit for $50,000, but you only use $25,000. That means, you have a $25,000 balance remaining, so your monthly payments are based on the amount that you used (i.e., $25,000) instead of the full $50,000. However, since a line of credit is technically a loan, it comes with a loan term. This term depends on the lender and can range from 3 months to 10 years but should not be mistaken with the loan’s life span. This kind of loan is a revolving credit line, so once you’ve paid off the amount used, the full approved amount of the line of credit becomes available again. Once you have created a business or funding plan and know the EXACT about of money needed to accomplish your business goals, now it’s time to identify the right bank, or financial institution and the best rate and terms. Regardless of the bank or institution you choose, be sure it aligns with your business goals.
However, do your best to avoid “hard-money” lenders that are predatory, have higher fees and offer shorter terms. Hard-money loans are designed to benefit the investors and not the business owners taking out the loans. Although marketed that way, most companies take these loans out of desperation, some are looking for a fast loan with fewer requirements than the bank and with shorter terms.
Recommendation for Start-Ups
One of the companies that I’ve researched and found to be a great resource for companies in their Startup phase is TruStart Financial. TruStart offers business term loans and personal lines of credit. They base their approvals on the business owner’s personal credit, if they are a Startup. If the company has been in business for over 3 years, they offer a business term loan. Their business lines of credit are funded with a variety of business credit cards, depending on the amount, that could disbursed on 1 to 3 different credit cards. However, if you’re approved for a business term loan, your business checking account is funded via bank wire, or written check. Apply Now!
Regardless of a business loan or line of credit, when using someone else’s money, do so with much care. It’s important to be mindful to make payments on time and according to the terms outline in the contract. Be sure there are no pre-payment penalties, or balloon payments. Finally, keep in constant communication with your bank or lender if you fall behind in making payments, to find out what options are available.