Which is Better for You: A Line of Credit or Term Loan?

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Within the trucking and transportation industry, there are two options to get started. Whether you’re looking to engage a single unit or a fleet, you can either rely on a line of credit or invest in a term loan. At Truck Loan Center, we like a credit loan better. However, there are pros and cons to both.

Which is Better for You: A Line of Credit or Term Loan?

If you’re at a crossroads and trying to determine how to finance your transportation, here are a few things to consider.

What is a line of credit?

Like a personal line of credit used to buy a car or finance a house, a business line of credit provides a sum of money interest-free until you begin using it. For a business, this loan may be provided as a secured or unsecured portion of money. Some of the reasons a business chooses a line of credit over alternative funding include:

Revolving loans: There’s no limit to the number of times you may use your line of credit, as it is repaid.

Modest interest rate: Lines of credit tend to carry lower interest rates than alternative loan types.

Just in case money: Lines of credit don’t need to be used right away. Some businesses keep them on standby for later use. Usually, this is part of a plan for larger capital.

There are also negatives to a line of credit, such as the fluctuation of interest rates based on missed payments and overages.

What’s the Difference Between a Secured and Unsecured Line of Credit?

As mentioned above, a line of credit (LOC) can be secured or unsecured, but what does this mean for your business?

Unsecured Line of Credit

An unsecured LOC isn’t linked to collateral assets, such as property or vehicles. When a business applies to an unsecured line of credit, banks look for well-maintained credit scores to guarantee no missed payments or overages will occur. Unsecured loans tend to carry higher interest rates to ensure lenders get back their investment.

Secured Line of Credit

Just the opposite of an unsecured LOC, a secured LOC is connected to collateral in the case of a business’s inability to pay. Lenders see a LOC as a short-term liability, so they may only request assets of an equal measure. For example, many businesses use inventory as collateral in a line of credit. This differs from other personal lines of credit, which do require property or vehicles to cover the risk of lending.

What is a Business Term Loan?

Business term loans, as the name suggests, require repayment over an amortization period. This term could be short or long, depending on the amount borrowed and a business’s current financial standing. Term loans are rarely unsecured, although some lenders make exceptions for startups. Benefits of a term loan include:

Choosing your own term: The borrower can select a repayment period with fixed or variable interest.

A single lump sum: Term loans are provided in a lump sum to be used as needed. This makes them as being an asset for long-term financial projects.

On the other hand, term loans come with a few downsides, such as higher interest rates, high closing costs, the loans don’t revolve, and repayment begins immediately.

Choosing Between the Two

Both lines of credit and term loans have their advantages, and selecting the correct one is a complex decision. There are many variables to consider while making your choice, such as:

  • Is the loan a short- or long-term investment?
  • How much interest are you willing to pay?
  • Future business projections.
  • The use of the money being borrowed.
  • Your current financial standing.
  • Whether you have collateral for a lien.

For a long-term loan being used over several years for equipment and fixed assets, a single sum delivered through a term loan is ideal. For a loan being used to fortify your business in future endeavors, a line of credit, either secured or unsecured, is best. A business line of credit is often applied for well in advance. To qualify and be considered a good candidate for such a loan, business owners must show current and future projections of profit to lenders. A line of credit is the better option for a short-term financing project. Some companies use a line of credit to secure earnings for staff during the offseason or to supply a temporary flow of money in other downtimes.

So, is a credit loan better than a term loan? The answer will depend on the characteristics of your company.

Borrowing as a Trucking Company

In the trucking industry, finding traditional sources for funding is difficult. The business model is extremely unique, making it tough for banks to weigh the pros and cons the way they would for a restaurant, a shopping mall, or other business types. As such, it falls to trucking companies to apply for alternative funding. Lines of credit, term loans, equipment financing from retailers, and other such options are often relied upon.

Working closely with an experienced loan specialist, you will better understand whether a credit loan is better than a term loan for your business and needs. Choose a lender who has worked with trucking companies before, so you know they understand your business plan and the potential you bring to the table. The trucking industry is a lucrative one, growing in leaps and bounds as the world expands global business opportunities. Now is a better time than ever to enhance your trucking company with the financing you need to succeed.

Why Choose Truck Loan Center?

At Truck Loan Center, we make trucking companies a priority and understand the ins and outs of what this industry entails. Working together, we can help you grow a new business or expand a successful one.

You can read more about our loan options and approval process directly from our website or call to speak to one of our experienced representatives. Being part of a business that works directly with trucking and transportation companies regularly, we can help you secure the best possible funding for your current or future projects.

For more information, visit us here. We are happy to offer free one-on-one consultations with new and current clients.


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