The financial market has a lot of options for funding small businesses during times of debt and growth. In order to choose the right option to further the interests of your business or to get out of a tight spot, the two common financial option that many small businesses turn to are lines of credit and term loans. Each of these types is distinct and has its own set of merits and demerits. To choose one of these forms of loans would depend entirely on the purpose of use.

Term Loan: This is the form of a standard loan wherein a lender loans out a certain amount to the borrower that is repayable in regular monthly payments. The term loans have fixed rates and are apt for businesses to buy new assets such as property, vehicles, computer equipment, manufacturing equipment, etc. Using a term loan would be highly beneficial as the purchase of these assets adds to a businesses’ value in a long time.

The line of credit: This form of lending is not the traditional loan of lending funds by a form by which a financial institution could grant an extension of credit like a credit card without having to go through the rigorous process of a loan. The line of credit will be the limited maximum amount up to which a business could borrow based on their specific needs. In a line of credit, the rates vary periodically depending on market factors. This would be helpful for business operating expense when there is a tight cash flow to cover any type of costs.

Term loan vs Line of credit

The primary difference between these two loan forms is the schedule of payment and the amount granted. A loan is a fixed amount dispensed at a one shot and is subject to repayment on a periodic basis, mostly monthly, for a fixed duration of time. In the case of a line of credit the amount borrowed varies with the business needs, and therefore the rates and repayment schedules are not within a set framework.