Which is right for your business?

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When your business needs financing to grow, fill cash flow gaps, or take advantage of an unmissable opportunity, where do you start? For business owners, there are more options than ever for financing. Whether it’s through the traditional route of your local bank or many new and burgeoning online lenders, you’ll notice that there are more loans available today than 10 years ago.

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But having more choices can become overwhelming. How can you be sure to make the right decision for your business?

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While there are many ways to think through your potential options, start by determining which type of loan – term loan or line of credit – is best for your business. Next, identify lenders based on who offers the product that best suits your situation. You can use this guide to help you decide which one is right for you.

Term Loans vs. Lines of Credit.

First of all. What is the difference between a term loan and a line of credit?

For starters, a term loan is the type of loan you’re most familiar with. It is a lump sum loaned to you and repaid over a specified period of time in monthly, bi-monthly, weekly or daily installments.

Lines of credit are revolving – think of your favorite credit card. With a line of credit, you get a certain amount of credit that you can draw on as needed, only paying interest on what you use.

So, for example, if you withdraw $5,000 from your $10,000 line of credit, you will only have to pay interest on the $5,000 you have withdrawn. As soon as you repay that $5,000, you will once again have access to the full $10,000. Or, once you’ve withdrawn that $5,000, even before you’ve paid it back, you’ll have access to the remaining $5,000 if you need it.

Impact of online lending on these products.

Above are the simplest definitions of these types of loans. But, the online lending industry has actually made these categories a bit more complicated than they once were.

For example, there really are many types of term loans. You can get long-term loans from the bank or the SBAwhich are low-cost loans with multi-year terms and monthly payments.

Related: How and where to get start-up business loans

You can also get medium term loans from online lenders. These are more expensive than bank loans but cheaper than other online options.

And, finally, a very popular online option is the short term loan. These term loans have very short terms – usually 3 to 18 months. They are repaid by daily or weekly payments and can be quite expensive. Although their credit requirements are less stringent, they can impact overall cash flow due to their short repayment terms, frequent payment schedule, and higher overall cost.

Lines of credit are a bit less complicated, but you should note that a line of credit from a bank will cost less than a line of credit from online lenders. However, lines of credit through online lenders are easier to get and have very quick applications, so when choosing where to start your search should come down to what your business can afford and how quickly. with which you need the funds.

Which is best for your business?

When you’re evaluating which of these products is best for your business, it really comes down to what’s most important to you.

If you need money fast, your best bet will be a line of credit from an online lender or a short-term loan. Both of these products have very fast applications and in many cases allow you to receive funds within days.

But, if you want the cheapest capital, you should start your search with the SBA or your local bank. These will always be the sources of the cheapest capital. However, SBA loans and bank loans can be difficult to obtain, so you want to make sure your credit and finances are in good shape before pursuing any of these options.

If you’re still not sure where to start, how you plan to use the funds is ultimately the best way to decide. If you’re simply looking for emergency capital, you should consider a line of credit. This ensures that you don’t pay interest if you don’t use the money.

Related: 4 financial tips every budding entrepreneur needs to hear

If you have a specific investment in mind, a term loan is usually preferable. You are able to easily calculate the cost of the investment before taking out the loan and decide whether or not it will provide your business with a positive return on investment.

Ultimately, financing your business can be expensive. If you hesitate between these two options, choose the one that costs less. Also, make sure you understand the math, as it can sometimes be difficult to determine the potential cost of a line of credit. Also pay attention to things like “factor rate” on a loan offer. Always ask the lender to provide their cost in April. If you’re not sure how to compare two offers, hire a loan specialist.

Aurora J. William