06 May Fixed Term Loan Vs. Line of Credit: Can I have both?
Some significant differences exist between a business line of credit and fixed term loans, what’s the smart option and can you have both?
Opening a Line of Credit
There’s a key advantage to obtaining a line of credit, you don’t pay for what you don’t use. That’s why it’s a good idea to apply for a line of credit before you actually need to use it. It can sit there until you need to draw on it giving you instant funds at the most critical times. It usually won’t cost you anything or at most some account keeping fees or a yearly line fee.
How a Line of Credit Works
Lines of credit can be easily understood when comparing to credit cards with a few exceptions. A lender will grant you a certain amount of financing, and that limit is similar to the maximum balance you can carry on a credit card. You won’t get charged anything until you drawdown funds and the interest you’re charged is only ever on the outstanding balance calculated daily.
Also like a credit card, business lines of credit are described as “revolving” or “evergreen”. You can use them again and again as long as the balance does not reach the maximum limit. For many entrepreneurs this is a huge advantage, you get continuous access to funds without reapplying for a new loan every time you borrow. One new lender that offers an unsecured revolving line of credit is Waddle.
Lines of Credit Vs. Fixed Term Loans
We’ve just gone over how the line of credit can help, what about fixed term loans? It’s fairly self-explanatory, with a fixed term loan you are required to repay the full amount within a set time frame, which is usually short term such as six, nine or 12 months.
Repayments are set amount usually at frequencies of daily, weekly or monthly with the interest calculated on the original amount you borrowed from the lender. No matter how low your balance gets you will still pay the same amount of interest through the entire period.
As you learned above, a line of credit only charges you interest on your outstanding balance and only requires principal repayments if you exceed your limit and you can repay amounts to reduce the amount of interest you’re charged.
— Loandesk © (@loan_desk) April 22, 2015
Can you have both types in place at one?
Yes. There are a fair few variation of lines of credit and fixed term lenders in Australia. Some are secured and some unsecured. Each lender operates a different way and often takes different levels of security from your business.
Finding the right fit takes understanding of how they differ. Lenders may seem the same on the surface, the mechanics of how they lend can vary quite significantly.
To find the best option, complete your Loandesk profile for free.
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