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July 23, 2018
A business loan or a line of credit – what’s the best way to fund your company’s growth?
Over the past few years, VNB has provided more than $1 billion in financing to local businesses. As a community bank, we want to be a trusted partner in helping our neighbors stimulate revenues and hiring, meet their cash flow needs and grow the local economy. We want you to believe VNB has stakes in your success and the prosperity of your community – because we do.
What separates a local bank like VNB from other business lenders? We make our decisions based on relationships and real people, not just an application form e-mailed into the ether. Our mission is to provide great personal service, access to local decision makers, fast response and continuity.
We take pride in offering higher levels of service and attention than large national banks. Our communications and processes are often richer, more informed and one-on-one. We strive to meet your banking needs with the greatest possible satisfaction. We want to grow with you.
VNB can provide many financing options, each tailored to meet individual business needs. We invite you to contact our experts today to learn more about VNB’s business funding options.
The Two Main Options – Loans and Lines of Credit
Two of the best sources of additional capital for small businesses are loans and lines of credit. Each has features and benefits that rising enterprises at all stages of growth may find appealing. Knowing the differences can help address short-term needs and empower long-term strategies.
The advantage of a business loan is the ability to invest immediately in assets that can fuel future growth. Business loans are generally taken on a one-time basis to purchase specific major assets that will continue to provide value to a business over the long term: capital equipment, vehicles, computer hardware and software, real estate, leasehold improvements and other big-ticket uses.
The term of a business loan is fixed (ordinarily 2 to 6 years but as long as 20 years), providing a specified amortization period. Banks prefer loans to be collateralized, but many offer unsecured options. Obtaining loans can become easier as a business matures, since most banks want to see – and will reward – a solid record of success.
Whether all the money borrowed is put to work immediately or not, monthly payments are fixed and equal, which is good for budgeting. Payments begin quickly, within a month, and are usually higher than lines of credit. A loan’s appeal can be interest-rate dependent since interest rates are often higher and normally fixed. Closing costs are higher, usually in the 2-7 percent range.
Business Line of Credit
A business line of credit can most easily be understood as a cross between a loan and a credit card. Like a loan, it provides you access to actual cash in your bank account, that you can use to pay for business expenses. Where it differs from a loan – and more closely resembles a credit card – is that a) you do not receive all the money at once (unless you need to), b) you can make minimum payments that are based on how much of it you have currently utilized, and c) at any time you can pay it down entirely, at which time you would pay no interest and not have any more payments to make.
Business lines of credit are basically an agreement with your bank on the maximum amount of credit they will extend to you without requiring additional collateral or new assessments of creditworthiness. A line of credit can be secured or unsecured. To qualify for an unsecured line of credit, a business must demonstrate healthy cash flow.
Like credit cards, lines of credit are typically revolving. They carry specific credit limits and can be used multiple times, for multiple purposes, as business needs dictate. They are best used to create flexibility for short-term operational financing needs, such as larger payrolls, unexpected or seasonal expenses, marketing initiatives, expansion costs or temporary cash flow challenges.
A line of credit can serve as an operational insurance policy, enabling growing businesses to draw from a cushion of cash when financing challenges arise. The debt is paid back as bills or receivables are paid and money flows back into the business. Payments are required only as money is borrowed, so a zero balance means no payments. It is important to keep payments as low as possible in relation to the balance, so available cash flow can remain strong.
In terms of process, closing costs for lines of credit are minimal, but they may carry fees for processing and credit checks as well as for each borrowing transaction. Interest rates can be lower, but frequently variable: many are adjusted periodically to meet the prime lending rate or another major benchmark. The interest rate offered may improve with solid credit management, but missing payments on a line of credit can result in significant increases in the interest rate.
Using lines of credit for long-term investments can unwisely tie up funds that could be needed in emergencies, limiting the flexibility to respond in more difficult times.
Whichever option proves most attractive, we hope you will contact VNB today. As a local bank with deep roots in the community, we stand ready to help our neighbors grow their businesses. Learn more about your loan and credit options here.