What is the difference between a Term Loan and a Line of Credit?

Term Loans are a great option when you have a larger, longer-term investment that requires a fixed amount of funding. For example, purchasing equipment or opening a new location are common reasons a business might use a term loan. Term loans are for a specific dollar amount, tied to a specific business purpose, to be paid back over a set period of time. A loan is granted as a lump sum for one-time use, so the credit advanced can’t be tapped back into as you pay it off. With a Term Loan, interest accrues on the full loan amount right away.

A Line of Credit, on the other hand, can be taken out against general business needs and is often used to smooth out cash flow. For example, if you have to pay bills while you’re waiting for revenue to come in, or need to invest in inventory ahead of a seasonal sales spike, a Line of Credit can give you flexible access to cash. A Line of Credit has a credit limit - just like a credit card - and you can draw down on that credit repeatedly while the Line of Credit is active. With a Line of Credit, interest accrues when funds are drawn down. Both Term Loans and Lines of Credit require payments that are a combination of interest and principal.

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