Choose Between: Line of Credit and Personal Loans

Nowadays, entrepreneurs who are hunting for cash boosts for their business ventures have a wide range of wealth options available to them. Regardless of the sharp gradient of popularity surrounding crowdfunding and peer-peer lending, businessmen still have faith in old school methods such as personal loans and bank lines of credit to help them amplify their horizon.Contrary to the similarities that we find within credit and personal loans, differences creep in. Here is a comprehensive guide to expect what from each option you tend to choose, the application procedure and repayment methods.

“B” for Basics!

We find businessmen resorting to the option of doctrinal loans when they know that they cannot afford the venture and hence require to purchase he loan only once. Illustrating with the help of an example, suppose a clothing company approach to purchase a loan for the purchase and installation purpose of new equipments for increase in productivity. These type of loans might outpace six figures, but it is not quintessential for all loans to be as ambitious and lows can be minor as $3,000!

On the other hand, we see that, lines of credit, are conventionally used for expenses that tend to recur, like, payment of employees and restocking inventories.Businessmen have the option of extracting money from the line of credit that they have been issued.Credit issuers like banks or credit unions put a limit on the amount of money that can be borrowed.

Comparative Study: Repayment of Loans vs Lines of Credit

A small business man has to sketch up his repayment schedules prior to being extended a loan.Normally this helps in determining the magnitude of the loan, its rate of interest and the monthly installments that the businessman would have to return to the moneylender.Contrary to the line of credit, loans have to be repaid almost immediately, with disregard to the usage of funds provided.On the other hand, in a line of credit, only the amount you’ve used need to be repaid back and conventionally a month’s time is given to payback a fraction of the amount borrowed.

Every line of credit is not the same. Payment methods vary from 1% to 2% of total funds borrowed. It’s always advisable to pay all the debts that pile up to avoid getting overburdened. Fixed payments are not possible every month since the amount extracted from your line of credit will vary.

These are known as financial products since they are being pulled from the same line of credit recurrently, commonly known as revolving lines of credit. The opportunity to clear out your outstanding debt is given every once or twice a year by your issuer. Usually lines of credit have a lifeline of one or two years, ceasing which, option of renewal or termination is given.

Lines of credit and loans are offered by both banks and credit unions.These financial institutions evaluate your personal and business credit track records and past borrowing histories, hence be sure to keep them clean to evaluate the chances of them defaulting the loan.A strong FICO score of at least 700 will fetch you the best rates of interests whereas credit scores below 630 straightaway discard or disqualify you.A lender might happen to ask you to put up collateral if your business shows weak success rates but strong credit points, more even if you are to apply for a line of credit, says Craig Smalley, leading expert in small businesses.

“A line of credit is usually tied to an asset for collateral,” Smalley says. “For instance, most lines of credit that small-business owners use are second mortgages on their homes,” meaning the collateral is the home.

“Sometimes, a small business is able to secure a line of credit with the collateral being the assets of the business,” Smalley says.

Lines of credit and personal loans aren’t interchangeable even though they can finance your business. Opt for a personal loan when you will require money for one time expenditures only so that it gives you the chance to repay your loan comfortably over a larger period of time. But if you are sure that you are capable of paying back loan amounts on a regular, installment basis, then line of credit is a good option.

P.S-Proceed with extra caution if you know you have been recommended to put up a collateral for your loan. Defaulting your loan could result in you losing your property.

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