Conventional Loans: Which is Right for You?
Term Loans and Lines of Credit
by Joyce Chen
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Online lenders have become a popular alternative to traditional banks for small business loans. They provide faster application processes, less stringent qualification criteria, and access to a variety of financing options. Two of the most common types of conventional loans they offer are term loans and business line of credits.
What is a Term Loan?
A term loan is a lump sum of money that a business borrows and repays over a predetermined period, typically with fixed interest rates and set monthly payments. Key features include:
- Loan Amount: Often between $5,000 and $500,000, depending on the lender
- Repayment Terms: Typically range from 1 to 5 years
- Fixed Payments: Payments are consistent, making it easier for businesses to plan and budget
Best For: Large, one-time expenses like purchasing equipment, expanding facilities, or funding long-term growth projects.
What is a Business Line of Credit?
A business line of credit is a flexible form of financing that allows businesses to borrow up to a set limit, withdraw funds as needed, and pay interest only on the amount used. Features include:
- Credit Limit: Usually between $5,000 and $250,000, depending on the lender
- Revolving Credit: Funds can be drawn and repaid repeatedly, as long as the credit limit is not exceeded
- Flexible Repayment: Payments vary based on the amount borrowed, and interest is only charged on the funds used
Best For: Managing cash flow fluctuations, covering short-term operational needs, or handling seasonal expenses.
Key Differences Between a Term Loan and a Business Line of Credit
Feature |
Term Loan |
Business Line of Credit |
Repayment Structure |
Fixed monthly payments over a set term |
Flexible, pay only what you use, often with no fixed term |
Interest |
Paid on the full loan amount |
Paid only on the amount drawn |
Loan Purpose |
Best for large, one-time purchases |
Best for recurring or short-term expenses |
Access to Funds |
Lump sum upfront |
Access funds as needed up to a credit limit |
Repayment Flexibility |
Less flexibility (fixed schedule) |
High flexibility (borrow and repay repeatedly) |
When to Use Each Loan Type
- Term Loan: Best for long-term investments such as buying equipment, expanding a business, or renovating a facility. It is suited for specific projects where the business knows exactly how much funding is needed upfront.
- Business Line of Credit: Ideal for businesses that need ongoing access to working capital. It’s particularly useful for covering payroll, purchasing inventory, or bridging cash flow gaps, especially in seasonal businesses where revenue fluctuates.
Conclusion
Small business loans from online lenders are an excellent option for businesses needing quick, flexible financing without the rigid requirements of traditional banks. Term loans are ideal for large, specific projects, while business lines of credit provide more flexibility for managing cash flow.
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