If you are a small business owner, having trouble getting financing from a financial institution might be an obstacle that you face from time to time. The reality is that scaling a business requires access to capital, and most small businesses have a significant portion, if not all, of their available funds already tied up in business assets.
In this post, we will compare loans and lines of credit, two of the most popular traditional business financing options, as well as alternative finance options designed with small businesses in mind.
Once you have a better sense of the financing landscape and interest rate environment, you will have a much easier time identifying your best financing options. There are a variety of advantages and disadvantages to any kind of financing, which is why it is important to consider your options carefully, while taking into account your current financial situation and future goals.
What are Fixed Term Loans?
Fixed rate loans are what you are likely to receive from a traditional financial institution, such as a bank or credit union, if you walked in and requested business financing.
A fixed rate loan has a set interest rate, as the name denotes, which means that you know how much monthly interest you will owe upfront. They also have a set repayment schedule, with most requiring weekly or monthly payments depending on the period of time the loan schedule extends over.
Some business owners prefer a fixed rate loan over a variable loan with a variable interest rate because they can more accurately predict their expenses each month. The repayment schedule does not vary, and the maximum amount of payment is set ahead of time for the entire term of the loan.
Fixed Financing Solutions from Merchant Growth
Offering a convenient alternative to the traditional fixed rate loan, our Fixed Financing Solution has all the upside of a business loan, but with far greater speed and less red tape.
Providing a lump sum up front, our Fixed Financing can be used to address any business need, with daily or weekly payments made to repay the balance. Ideal for businesses with predictable cash flows, this type of financing provides peace of mind thanks to its convenience, flexibility and predictability.
What Is a Line of Credit?
A line of credit, on the other hand, is a different form of borrowing that allows a business access to capital as they need it. They only have to make payments when they borrow off their open line of credit and then repay it typically soon thereafter. Many businesses open a line of credit based on their invoicing practices in order to help keep cash flow moving while in the midst of large projects that don’t pay out until the project is complete.
An open line of credit only requires the borrower to make monthly payments when it is used, which means there is a variable interest rate attached to it since a line of credit can be accessed at different times. Typically, the credit limit is set to be 25% of the qualifying limit of what a business would be approved to borrow. Lines of credit tend to offer better interest rates than credit cards, and interest is only owed on the amount you actually borrow.
Some business owners prefer a line of credit because there are no fees unless they take the money out and find that the balance is easy to manage. A line of credit can be a nice safety blanket that exists without necessarily adding any debt to a company.
Is a Fixed Rate Loan or Line of Credit Better?
This question does not have a set answer, because figuring out which is better involves a number of considerations. What type of industry your company works within, how you intend to pay your loan back, and your preferred financial strategies all dictate which is the better option for you.
That said, here is a closer look at several questions that you should ask yourself before taking out any fixed rate loan or a line of credit. The answers can help you decide which financial product is going to fit your needs better.
How Quickly Do You Need a Loan?
One major question to answer is how quickly your business needs access to financing.
Lines of credit can usually be opened quickly if your repayment plan is tied to your invoicing. Fixed rate loans, in contrast, may take longer to obtain as there may be an underwriting process, but fixed interest rates tend to be lower. As an alternative financiers, we tend to have the fastest application processes and approval times, so if your business needs immediate financing, Fixed Financing solutions are the way to go.
How Do You Plan to Repay the Loan?
How you plan to repay the loan is a big factor to consider when choosing which loan type best fits the needs of your business.
Lines of credit only require payment when you borrow from them, so they have variable rates attached at the time of borrowing. This means that your repayment plans can vary based on how often you have to access your line of credit, which can be disconcerting for some business owners who prefer a set loan term and payment schedule.
Fixed rate loans, on the other hand, require monthly payments that are fixed. They may or may not have higher interest rates attached to them, depending on the current interest rates. Therefore, it is a good idea to take a look at the market before taking out or paying for any loan. There are other details you should investigate as well, but they do offer a predictable loan repayment schedule which many businesses find comforting.
What Type of Loan Term is Desirable?
Finally, fixed rate loans have a fixed loan term which is also comforting to many business owners since the financial impact of a fixed rate loan can be analyzed before the final papers are signed. Variable rate loans, on the other hand, have variable loan terms based on when funds are accessed. Both can be paid off in advance, but the fixed rate loan will likely pay interest before the principal amount, so that should be considered as well as other details.
Financing Built for Small Business
If you are in search of a lending partner that supports your needs, consider Marchant Growth’s suite of financing products for small businesses. With our own fixed financing solutions, lines of credit and e-commerce financing to choose from, you can get the right type of funding for your business needs in as little as 24 hours once approved. Apply today!