Business Line of Credit / Business Term Loans
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What is a business line of credit used for?

Small business lines of credit are commonly used to pay for short-term business needs like payroll costs, buying new inventory or dealing with temporary business hardships. They’re not used for long-term business needs, like purchasing expensive equipment or buying real estate.

How a business line of credit works

A business line of credit works a lot like a credit card. You can borrow money up to a preset credit limit. You’ll pay interest only on what you borrow, and when you repay it, the line replenishes itself for you to use again. Business lines of credit can be unsecured or secured, which means you’d have to provide collateral to guarantee the line.

Business Term Loan

A business term loan is a lump sum of capital that you pay back with regular repayments at a fixed interest rate—this type of traditional financing is what most people think of when it comes to small business loans.

Generally, business owners use the proceeds of term loans to finance specific, one-off investments for their small businesses such as real estate purchases, business expansions, debt refinancing, and more.

How Do Business Term Loans Work?

With a term loan, a small business lender gives you access to a lump sum of capital—which you then pay back, with interest and fees, over a set period of time.

Although your payment schedule will vary based on the type of business term loan and the lender you’re working with.

This being said, business term loans can be issued by banks, credit unions, and online lenders. In general, banks and credit unions will offer the most ideal rates and terms, but will also require top qualifications and will be slower to fund. Online lenders, on the other hand, will offer greater flexibility and faster funding times, but will likely be more expensive and have shorter terms.

Overall, in addition to a predictable payment schedule, one of the benefits of business term loans is that they can be used for a variety of business financing purposes.

You’ll find that these loans are often used for:

  • Purchasing equipment or inventory
  • Working capital
  • Refinancing other business debts
  • Hiring staff
  • Meeting payroll or tax obligations
  • Financing business expansions
  • Purchasing real estate
  • Funding general long-term investments

Business Term Loan Example

To get a better sense of how business term loans work, let’s walk through an example.

Let’s say you’re offered a term loan of $250,000 with monthly payments and a two-year term. The interest rate on this loan is 8% and you’re paying the lender an origination fee of 2%.

With this information, you can plug-in the numbers into a term loan calculator to estimate your monthly payments—as well as determine how much this loan will cost your business.

Overall, you’ll be making monthly payments of $11,306.82 to the lender with a total repayment of $271,363.75. The cost of this loan, therefore, is $26,363.75. In addition, you can also use these calculations to determine your APR, as opposed to the simple interest rate. If your interest rate is 8%, but you also have an origination fee of 2%, your APR will end up being higher than that quoted 8%.

In this case, the APR on the loan is 10.01%.