Your business is doing well, but you see potential for substantial growth. Whether it’s upgrading all of your office technology, renovating your warehouse or moving to a better location, the updates and improvements you need to make are going to have a dynamic impact on your budget. It will be negative at first, but over time, things will flip to the positive and you will be able to transition from merely surviving to thriving.
It’s a smart move and now is the perfect time to put your plan into action. But which is the best way to get access to the funds you need to achieve these goals? Should you take out a loan or open a line of credit? The two may seem similar, but one is better suited than the other depending on your circumstances and the state of your business. This article highlights some of the key differences between a loan and a line of credit so that you may better understand which financial tool is best for your particular situation.
- Loan: When you apply for a loan, you will need to detail exactly what the funds are going to be used for and how it will help your business.
- Line of Credit: You do not need a specific reason to open a line of credit. In fact, you might think of it more as a safety net, something that’s there just in case you need it.
- Loan: You get a loan when you need money.
- Line of Credit: You open a line of credit before you need money.
- Loan: When you get a loan, you pay back the entire amount. If you borrow $45,000, you pay back $45,000. Even if you didn’t spend it all.
- Line of Credit: If you have a $45,000 line of credit, you pay nothing back until you spend it. If you only spend $5,000, that’s all you pay back. After you pay back that $5,000, you’ll have access to the full $45,000 again without reapplying.
- Loan: Loans should be reserved for covering expenses that could take a number of years to pay off. If you’re updating expensive equipment or moving to a new that will incur high relocation costs, you may want to consider a loan.
- Line of Credit: As previously noted, a line of credit is your safety net. If you tie it up with expenses that you cannot pay off for years, the net won’t be there when you need it. Reserve your line of credit for temporary cash flow shortages.
- Loan: Most loans come complete with closing costs, which, depending on the amount borrowed and the rate, could wind up costing a substantial amount.
- Line of Credit: When you open a line of credit, the closing costs are typically minimal or nonexistent.
The foregoing information is provided by City National Bank (CNB). Unless otherwise stated, opinions expressed are those of the respective authors and not necessarily those of CNB. The information is provided without warranty and no recommendation or endorsement by CNB is intended or should be inferred unless specifically stated.
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