Loan vs Line of Credit: What is best for your business
When you own a business, there are a lot of different things you have to decide on. One of those decisions can be about borrowing money. This is always a sensitive topic, and it can be difficult to know what to do. Two common options for business owners looking to borrow money are loans and lines of credit. But what are the differences, and how do you know what is best for you? Let’s learn a little bit more about each option and explore some of the differences.
When you get a loan for your personal use, you typically use it for a big purchase, like a house or a vehicle. When you get a loan for your business, you want to use it in the same way. Maybe you need an expensive new piece of equipment or a new company vehicle for your service team. When you are looking to purchase a big-ticket item, typically, a loan is the better option. For a loan, you get a large sum of money upfront and use it immediately to make your purchase. You only use the money one time, and then you pay it off according to the terms of the loan, with the interest, of course.
Line of Credit
A line of credit is a great backup tool for any of those things that pop up on business owners. You know what we mean, things like a new modem that wasn’t budgeted for, repair to a damaged window on a company vehicle, or a month that you didn’t quite hit your sales goals. This can be a great safety net in these types of situations. A line of credit can be compared to your personal credit card. You get a sum of money that you can borrow when needed. The nice thing about a line of credit is once you pay it back, you can keep reusing the same money. Let’s say you have a $5,000 line of credit, you borrow $300 for service on one of the vehicles. Your line of credit is now at $4,700, but once you pay that $300 back, you are back at a $5,000 line of credit.
The most important thing to do when considering borrowing money is to look at your business’s overall and current needs. Another thing to consider when you are looking to borrow money is your business’s financial well-being. Do you have a precise understanding of your business’s finances? If not, then it is time to call us.
At Devine Consulting, we are your professional accounting team and would love to help get you on the path to greater financial insight. Call us today at 281-545-4000.