The most accessible type of small business capital for small business owners is debt financing, which includes small business loans and small business lines of credit. If you’re seeking small business capital, it’s very important to understand that small business loans and small business lines of credit are two very different types of small business capital. The biggest (and most obvious) difference between a small business loan and line of credit is:
- Small business loans have fixed interest rates and terms and are considered long term financing. Long term financing is generally used to purchase large assets such as equipment and machinery.
- Small business lines of credit have variable interest rates and terms and are considered short term financing. Short term financing is generally used to purchase supplies and inventory and cover payroll.
Once the total amount of a small business loan has been used, you’ll need to re-apply if you need more financing. However, the good thing about obtaining a small business loan is that you’ll have the same monthly payment for the life of the loan. This will make it easier to budget because you will already know what to expect in regards to monthly payments. You’ll also be able to pay it back over time.
Small business lines of credit are revolving, meaning that you can have access to them for the life of your small business if you manage the debt properly (and the lender wants to continue their relationship with you). Lenders may also continuously increase your credit limit over time if the small business line of credit is properly managed (increasing your access to capital year after year). However, your monthly payment may vary depending on how much you spend from the small business line of credit. Because of this, you’ll need to plan ahead before you begin using the small business line of credit to be sure you can handle the monthly payment.
If you want to determine if a small business loan or small business line of credit is right you, ask yourself:
- Will I need ongoing access to capital? If you own a small business that will continuously need outside funds to operate efficiently and effectively, you may find that small business lines of credit are more suitable for you than small business loans. This is because once a small business loan is used, you’ll have to re-apply to get another and there’s no guarantee that you will be approved again.
- Can I afford to pay a fixed monthly payment? If you don’t have the ability to pay the same monthly payment every month, a small business loan may not be suitable for you. With a small business line of credit, your monthly payment will vary depending on how much you use. If you don’t use the small business line of credit for a particular, you may not have a monthly payment for that month (as long as there isn’t a current outstanding balance).
If you are still unsure about whether or not a small business loan or line of credit suitable for someone in your unique situation, you may want to consult with an expert who is well versed in the small business finance arena. The most reliable and knowledge experts will be able to properly analyze your business and situation to determine whether a small business or line of credit will be best for you at the present time.
Brittni Abiolu is the Owner & Publisher of www.CapitaLinker.com. Through her website, she serves to educate entrepreneurs and small business owners on how to increase their chances of obtaining capital in the simplest way possible and how to find and connect with the most appropriate funding sources. You can connect with Brittni on Linkedin, Google+, Twitter, Facebook, and Pintrest.
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