Choosing between Short Term Loans and Line of Credit


As more and more people are trying to cope with the challenges of surviving in the world, they come up with new ways of doing so. One of the ways of surviving is to establish a business of your own. But the point to note is the type of business you want to start? You can kick off with small businesses and go up the ladder or instantly start big.

Whatever type of business you are starting will be in need of money. But the amount that you want for your business can be obtained in two ways; a line of credit and short term loans. Both of them can help you with the business you want to establish but in very different ways.

What are the types of Term Loans?

There is a wide difference between the line of credit and term loans. So understanding them both will draw a visible line between which to choose for your business. The term loans are the simplest way of acquiring money. There are basically three types of term loans which will be discussed below. The application process is almost the same with little difference of time, amount and repayment options.

  1. Short term loanfulfils the requirements of businesses on daily basis. The amount borrowed is small and the repayment period in within 2 years. The short term loans can be obtained by any lender, commercial or private bank and other financial companies.
  2. Medium term loans are a mixture of short term and long term loans. It stands in the mid-point between the two. The loan amount is more than short term loans but the period is lesser than long term loans. An average credit score is needed to apply for medium-term
  3. As the amount borrowed under these loans is larger, the credit score should also be higher than 600 in long term loans. The payment period is more than 5 years up to 15 years but the borrower must have to deposit some type of collateral to have the loan approved.

5 Kinds of Lines of Credit:

The second option there for you is to borrow money through lines of credit. These are much different from the term loans in many ways. But you need to understand these 5 kinds of lines of credit to choose which one is best for the business.

  1. The Business LOC can either be secured or unsecured depending on the amount that you are going to borrow. You can use the amount whenever you want to and the withdrawal of money also depends on the needs of the business. Orumfy is one of the best amongst many online platforms that provide the best options for it.
  2. As the name suggests;Home Equity Lines of Credit (HELOCs)the house is given as collateral after that the amount can be received. The amount is calculated with the difference between the actual values of the house and the market value which becomes approximately 70%.
  3. Demand LOC is used on very rare occasions. The whole of the credit limit can be used at any time. A secured or unsecured Demand LOC can be applied with various terms and conditions depending on the usage and time period.
  4. Personal Lines of Creditis the simplest way to get a Personal LOC because you can borrow money, use it, repay it and then utilize it again. Easy and clear requirements of no defaults, credit score higher than 600 and a steady income.
  5. Something for guarantee must be provided in order to apply for Securities-Backed Lines of Credit (SBLOCs).The borrower can receive up to 95% of the value of the property held up as collateral. This LOC requires the borrower to pay back in monthly instalments until the amount is fully repaid.

The Choice of Line of Credit or Short Term Loans:

To completely know what difference between loan and line credit you need to understand the various aspects that make these two; lines of credit and term loans distinct. These different aspects will make it easier for you to choose the right type for your business.

The Amount Received:

In term loans the amount is received is a lump sum, you cannot take or receive the money in instalments. But in LOC the amount remains in your account and you can use it either all at once or take out as much is required. There is no obligation of how much amount you withdraw from the account in LOC.

The purpose is Different:

The amount used in both LOC and term loans is different. The term loans must be used only for the reason they are borrowed as there are people who are watching the loan being used. But the LOC amount can be used for any reason concerned with business development and establishment.

Payment Method:

Monthly instalments are used for the term loans but the repayment of LOC is varied as the money can be paid in whole. You have time for repayment of LOC and you have to pay within the time period; either you do it as a whole or pay in instalments.

The rate of Interest Divergent:

The rate of interest is usually fixed and is higher in term loans depending on the type of loan you are applying. But the LOC hasa lower interest rate and can change relying on the amount borrowed and the credit score you have.

So it must be easier for you to understand that lines of credit are far more different from short term loans and which one to apply for what purpose it will serve the business.

Leave a Reply

Your email address will not be published. Required fields are marked *