Small Business Financing: Loan or Line?

Ready to scale up your business?

Whether you’re planning to roll out a new product, expand your territory, renovate your storefront, grow your team, or make any other kind of strategic investment, you’ll likely need some funding.

Both term loans and lines of credit can allow you to take advantage of new opportunities while maintaining sufficient working capital to cover your current operating expenses. Each form of financing has its own set of advantages that you should compare against your needs and goals.

Term Loans

As a non-revolving form of credit, term loans provide businesses with a lump sum of money upfront, which is repaid in fixed monthly installments over a set period. Businesses may benefit from term loans if their expenses are predictable, not fluctuating. Term loans can be secured with business or personal assets as collateral, unsecured, or self-collateralizing (such as an auto loan, which is secured by the vehicle it’s financing). Here are seven potential benefits of a term loan:

• They can be approved for a larger amount of money based on the collateral value.
• Repayment terms are typically longer, providing flexibility on the monthly payment.
• Fixed interest rates provide predictable monthly payments, which make budgeting and forecasting easier.
• They can be used to consolidate higher-interest debt with a lower-rate loan.
• No annual credit renewals are needed to keep the account active.
• No monthly or annual fees are charged after the initial loan closing.
• Unsecured loans don’t require a lien on business assets.

These attributes make term loans especially well-suited for specific, one-time, big-ticket financing needs like equipment purchases or IT upgrades.

Lines of Credit

As a revolving form of credit, lines of credit allow businesses to withdraw money as it’s needed, up to a set limit. As funds are repaid, they can be re-borrowed. Businesses can use lines of credit to fund many smaller expenses as they arise over time, for virtually any purpose. Lines of credit can either be secured with collateral (as with a HELOC, aka a home equity line of credit) or unsecured (as with a business credit card). Here are some potential benefits of a line of credit:

• Lines often have lower rates and lower closing costs than comparable term loans.
• They can be used to cover routine costs like inventory and payroll if needed.
• Interest payments are only assessed on the amount borrowed from the line of credit.
• Minimum monthly payments are interest only, providing flexibility when cash flow is tight.
• They can provide a financial safety net in case unexpected expenses come up.
• You can pay off your entire balance at any time with no prepayment penalty.

These features mean that lines of credit are often a smart choice for ongoing projects, unpredictable expenses, supporting cash flow, and any seasonality your business may experience.

Other Options

Term loans and lines of credit aren’t the only way to fund growth. Crowdfunding, angel investors, vendor credit, grants, and partnerships are among the alternative strategies that some entrepreneurs have used to their advantage. But loans and lines are the most popular forms of small business financing and can meet the needs of nearly every growing enterprise.

Be Prepared

No matter what form of funding you’re pursuing, most lenders and investors look for the same set of qualities in prospective business partners. These are often summarized as the 6 C’s:

1. Capacity – your earnings, debt service ability, and preparation for ups and downs
2. Capital – how your assets stack up compared to your liabilities, and how liquid they are
3. Collateral – the assets you have that can be borrowed against, and any debts attached to them
4. Conditions – your business’s position in the marketplace and the overall economy
5. Character – your personal integrity, industry experience, and borrowing history
6. Communication – your willingness to engage in open and honest dialogue with your lender

Take the time to understand and optimize these factors before applying for a loan or line for your best shot at a quick approval and good rate.

Explore Every Opportunity

In business, there’s no off-the-shelf solution for every financing need. Contact ENB to discuss your full range of options and learn how a term loan or line of credit could support your business.