.jpeg)
Whether it’s improving your cash flow, consolidating existing debts, or acquiring fixed assets, getting a business loan will greatly aid in those endeavours. Among them, term loans and lines of credit are some of the best ways that businesses can bolster their finances.
If you’ve been struggling to decide on which of the two is best for your business, this article will explore comparing term loans and lines of credit to help you decide which to pick when borrowing money for your business.
Conventional business term loans are special credit products issued to small, medium, and large businesses to be repaid over a predetermined period. They can be used to buy more inventory, hire staff, get extra equipment, or just to increase your capital. They carry a term of up to 5 years, and like other non-revolving credit products, they are granted as a lump sum for borrowers to use as indicated in their loan contract. Repayment is also typically constant (i.e. fixed monthly instalment) with interest and principal paid together.
Financial institutions look for certain criteria when assessing your company’s term loan application. Depending on the lender, these criteria vary but revolve around the company’s age, credit rating, payment history and more.
Some examples of term loans include:
Generally, secured loans require some sort of collateral—It may be property, vehicles, or even the business itself. They do come with lower interest rates because the collateral acts as a form of security for the lender. This reduces the risk for the lender, as they have a tangible asset to rely on in case a borrower defaults on the loan.
Unsecured loans, on the other hand, are not backed by any form of collateral. As they are unsecured, lenders typically approve smaller amounts with higher interest rates compared to secured loans.
The SME working capital loan is a government-backed loan that holds a term of up to 5 years. To qualify, businesses have to be registered in Singapore and have at least 30% liquidity held by local or PR Singaporeans.
Equipment financing is a type of loan that allows companies to purchase tools and equipment they need for their business. For this type of loan, businesses make repayments for the equipment purchased over a predetermined term.
A line of credit works differently from a term loan. With lines of credit, the lender grants the borrower access to a predetermined credit limit that can be used repeatedly.
Unlike purpose-specific loans, credit lines can be used for any purpose, from routine purchases to specific expenses, such as business trips, minor renovations, or daily operational costs.
The line of credit operates similarly to a credit card, or in some cases, a checking account. The account holder can access funds at any time with the only limit for the funds being the credit limit set by your lender.
For example, if you have been approved for a credit limit of $50,000, you can use the entire amount for any business expense. However, each time you use a portion of the credit, your available limit decreases accordingly. So, if you use $30,000, you will have $20,000 remaining credit available for future use. To regain full access to your original $50,000 limit, you would need to repay the $30,000 balance. Once the balance is settled, your credit line will be restored, and you can utilise the full $50,000 limit again. This also means that you only pay interest on the amount that you draw down and not on the full facility amount. Therefore clients can time their draw down and repayment to match their cashflow gap to minimise interest cost.
Much like term loans, lenders review a number of factors before approving a loan application. Documents such as your company’s income statement, balance sheet, personal and business tax returns are used to gain insight into the financial health of your business.
There are various types of lines of credit available. The following are some of them:
Generally, secured loans require some sort of collateral—It may be property, vehicles, or even the business itself. They do come with lower interest rates because the collateral acts as a form of security for the lender. This reduces the risk for the lender, as they have a tangible asset to rely on in case a borrower defaults on the loan.
Unsecured loans, on the other hand, are not backed by any form of collateral. As they are unsecured, lenders typically approve smaller amounts with higher interest rates compared to secured loans.
A revolving credit line is a credit facility that allows businesses to borrow, repay, and borrow again as long as they stay within the credit limit set by your lender.
A non-revolving credit limit is a one-time use limit. If you have a non-revolving credit limit of $50,000, once you have used up all $50,000, it means that you cannot reuse it.
.png)
Both term loans and lines of credit serve as critical instruments to foster the financial growth of your business. If you are looking to borrow a large amount only once, then the term loan is the right loan for you. If you need more than one lump sum of payment, a line of credit is the most useful but may come with increased fees. Overall, it's crucial to thoroughly evaluate your financial needs before applying to determine the best fit for your business.
Our team of experts at Lendingpot are here to ease your journey to get a business loan. Learn all about business financing from our blog and stay informed on the latest developments in the SME loan market by subscribing to our newsletter.
Apply for free and get started on your first business loan application today. Get a loan offer from our 45 partners within 48 hours of your application. Contact us to learn more about how we can help your business acquire favourable loan terms.
Lina heads up all things marketing and branding at Lendingpot. With a keen aesthetic eye, she believes in the use of design to communicate with our SME community and aspires to turn Lendingpot into a household name. Out of work, she is an avid camper and appreciator of nature’s best works.
