“What form of credit facility should I opt for?” is a question that plagues the minds of small business owners who are currently low on cash and are looking to raise funds from credit providers, be it traditional institutions like commercial banks or digital lenders like Pennee.

In this article, we will be highlighting these two forms of credit facilities and providing you with adequate information to help you make an informed decision.

Business Loan

Business loans, also known as term loans, are a form of loan offered to businesses in a lump sum, which they must pay back at an agreed time with interest.

There are several business loans offered by financial institutions. Examples of these loans are;

• Asset financing: This loan form enables your business to access capital assets like machinery and plants. The purchased assets usually serve as collateral for the loan.
• Invoice discounting: Not to be mistaken for factoring, invoice discounting is when a financial institution uses your unpaid invoices as collateral to grant access to a loan to meet your working capital needs, pending when your debtors fulfill their obligation. This form of credit is usually availed to service providers of blue-chip companies as the risk of the debtor defaulting is low.
• Working capital loan: This type of loan is available to businesses with pressing working capital needs like paying employees or purchasing inventory. It is a short-term loan with a repayment period ranging between six to twelve months.
• Long-term loans: This type of loan is used to finance capital expenditures such as a planned business expansion or acquisition of landed property. The term usually ranges from three years and above.

The ease of obtaining a business loan depends on the source of the loan. Getting a business loan from a large commercial bank usually involves a lot of paperwork. It also takes longer due to corporate bottlenecks when compared to loans from digital credit providers who use technology infrastructure to make faster and more informed financial decisions.

Line of Credit

A business line of credit is a credit facility that allows you to borrow up to a specific limit. It is an advanced version of your personal credit card. As with credit cards, you can choose to repay a minimum amount every month with interest-only calculated on the unpaid balances or you can choose to clear off your loan obligation at once.

A major advantage of a line of credit over a business loan is that it is open for drawing at any time, thus making it a dependable source of credit to meet any financial needs that might possibly arise.

Both traditional financial institutions and digital lenders offer customers access to a business line of credit. Like business term loans, traditional institutions take a long time to disburse loans when compared to their digital lending counterparts. The only difference is that the documentation requirement from traditional lenders is often one-off subject to the extension or renewal of the line of credit.  

Which should you go for?

The type of facility you should go for depends on factors such as the amount of money you need, what you intend to use it for, and how you intend to repay the loan.

However, as a business owner, a business line of credit is usually a more preferred option as you can enjoy the freedom of accessing your credit line as your business needs arise while avoiding the strict repayment terms of a business loan. Also, the nature in which interest is repaid also helps manage the amount you repay as interest.

As a company created to solve the financial problems of small business owners, Pennee offers lines of credit to small business owners who need financing to scale and become the Unicorns they are meant to be. You can contact us via mail at swift@pennee.co 

Conclusion

Taking up a credit facility is something that every small business owner should give a lot of though before delving into. It takes a lot of thinking and planning to decide on a suitable form of credit financing to undertake.

Still unsure how to raise funds for your small, here is an article that we believe you would find helpful.

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Are you a small business owner struggling with managing your cash flow, or are you in need of a credit facility to help grow your business? Pennee is a company for small business owners that offers credit facilities and cash flow management solutions to small business owners to help your business grow into the brand you want it to be.