by Debi Enders
What Is The Difference Between A Line Of Credit And A Term Loan?
With a term loan, the lender gives the recipient a fixed amount of money to be repaid over a period of months or years. A line of credit gives a company the option of borrowing as much money as it needs, up to a prearranged amount. While a term loan allows you to make a specific purchase, such as equipment, or to expand your business, a credit line is meant to be borrowed against and paid back on a regular basis throughout the year. A line of credit could be used by a company that is seasonal or has payroll to meet before its receivables arrive. The decision on whether to choose a line of credit or a term loan should be based on how much capital is needed and how long it is needed.
Here are a few more details on each.
Line of credit
• A 12-month revolving line that renews every 12 months if handled properly.
• Borrowed against and paid back on a regular basis throughout the year, with at least one month out of the year at a zero balance.
• Interest paid is based on the amount that is borrowed.
• The ideal candidate is a company that is seasonal or has payroll to meet before its receivables arrive.
Term loan
• The entire amount of money is received up front
• Interest is based on the full amount starting on the first day of the loan and is paid in exchange for the loan.
• Repaid over a period of months or years.
• The ideal candidate is a company in need of funds for a specific purpose, such as purchasing equipment, expanding or other business expenses.
With either option, your banker will be looking to you for qualifications including good credit history, proof of repayment source from the operating business and collateral.
Debi Enders (debi.enders@commercebank.com) is assistant vice president, small business banking at Commerce Bank.
Submitted 10 years 178 days ago