Small Business Financing: Loan or Line?

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 game-changing 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:
• You can generally get approved for a larger total amount of money.
• You may have an extended period to pay back the loan.
• You may be able to budget and forecast more easily with predictable monthly payments.
• You may be able to lock in an affordable and predictable fixed interest rate.
• You can consolidate and pay down high-interest debt with a lower-rate loan.
• You won’t have to submit to an annual credit review to keep your account active.
• You won’t have to pay monthly or annual account fees.
• You may be able to avoid having a lender place a Uniform Commercial Code lien on your assets.
• You may be able to avoid rate hikes in the event of a late payment.

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 and when it’s needed, up to a set limit. As funds are repaid, they can be reborrowed. 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.
• You can cover routine costs like inventory and payroll if needed.
• You may be able to lock in a competitive interest rate with good credit history.
• You will need to pay interest only on the exact amount you use.
• You can make lower payments in months when your cash flow is tighter.
• You won’t have to contend with any prepayment penalties.
• You will have an enduring financial safety net in case unexpected expenses come up.
• You will have the opportunity to pay off your entire balance within a short timeframe.
• You may have the chance to lower your interest rate with good credit management.

These features mean that lines of credit are often a smart choice for ongoing, evolving projects like site renovations and product line expansions and for businesses with unpredictable expenses.

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 six 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 fast and fair offer.

Explore Every Opportunity
In business, there’s no off-the-shelf solution for every financing need. To investigate your full range of options and the ways that they can be customized to your unique capacities and objectives, contact S&T Bank.

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