Business Loan Definitions Made Simple

As a small business owner, there might come a time when you need access to additional funding. Unexpected opportunities, growing your business, or replacing vital technology all require financial resources.

While you need to cover these expenses, you also want to make sure your business has enough cash flow to continue operations.

There are many options out there for you to explore, and many will be suitable, depending on your specific needs and circumstances. It’s important to know the difference between them, so you can make the best decision for your business.

Line of credit

A business line of credit is a flexible loan from a financial institution that gives you access to money you can draw from as you need it. As you repay the principal, the amount you can access replenishes. You can continue drawing against your line of credit for as long as your account remains in good standing.

Lines of credit are useful for temporary costs, such as:

• Cash flow issues that can result from slower months that make it difficult to cover short-term expenses.
• Seasonal business fluctuations where your business experiences revenue fluctuations throughout the year and may need money to cover costs during the off-season.
• Unexpected expenses such as urgent repairs that are needed so that your business operations continue smoothly.
• Small-scale expansion that won’t require long-term and ongoing costs. This might include renovating a business location to make it larger or opening a new location.
• Inventory purchases, which is often a cost for retail and wholesale businesses that must purchase inventory upfront but won’t receive payment for that inventory until later. A line of credit can ensure a steady flow of inventory without tying up cash.
• Taking advantage of opportunities that may require a short-term financial investment. A line of credit enables you to seize these opportunities without applying for additional funding.

When managed properly, a business line of credit can also help establish a solid business credit history, which will help obtain larger loans or better credit terms in the future.

Business lines of credit are beneficial because they are flexible and interest is only paid on the amount of credit that has been used, not on the whole amount.

Term loan

A business term loan provides you with a lump sum of cash at the start of the loan, which you then repay over a set number of years, typically referred to as the ‘term’ of the loan. The loan repayment schedule is generally fixed, so you pay the same amount on a regular schedule. Interest is charged on the full amount of the loan, whether you actually use the full amount or not. Each payment is put towards both the principal, which is the amount you borrowed, and the interest. Once the loan is paid back, it is no longer available to you.

Term loans tend to be beneficial for larger business investments. This includes:

• Large, one-time purchases such as equipment or vehicles where your business needs to pay for the equipment up front. With a term loan, you can pay back the cost of the equipment as the investment pays off.
• Long-term business expansion, where you may have large up-front capital needs, such as purchasing real estate or buying facilities, but may not have the money available to do so.

Term loans are preferrable for larger expenditures because they have a fixed repayment schedule and longer repayment terms than lines of credit. This means your payments will be more widespread, predictable and manageable.

Equipment loans

Similar to car loans, equipment loans are used to purchase a specific item, in this case equipment. A restaurant could use an equipment loan to buy kitchen appliances, whereas a manufacturing business might use the loan for heavy machinery.

The loan itself is structured much like a term loan, but in this case the equipment being purchased would typically serve as the loan’s collateral. This means that if the loan payments are not kept up to date, the lender can seize the equipment. Because the loan has collateral it’s often easier to obtain than an unsecured loan.

Healthcare practice loans

These are designed to help you access the funding you need to run your healthcare practice, whether you’re a doctor, dentist, chiropractor, veterinarian, physical therapist or other healthcare provider. The money from a healthcare practice loan can be used to purchase or start a new practice, buy equipment, purchase commercial property, and consolidate debts.

Commercial real estate financing

You can access commercial real estate financing to expand, renovate, or refinance your business location. It can be used for any type of property used for business purposes, such as office buildings, restaurants, shopping centers, or warehouses.

Association loan (AOAO)

These are designed to provide financing for homeowner and condominium association needs, such as equipment purchases, resident manager unit purchases, building upgrades, repairs or renovations to common areas, lease to fee purchases.

By accessing an AOAO loan, the association can extend the cost of a major expense over a longer period, instead of paying it upfront. Additionally, associations can undertake repairs when needed without affecting their liquidity.

Next steps

• Determine whether you need short-term flexibility, long-term funding, or financing for specific purchases like equipment or real estate.
• Research different types of loans, including lines of credit, term loans, and specialized financing, to find the best fit for your business goals.
• Review interest rates, repayment schedules, and collateral requirements to make sure the loan aligns with your financial situation.
• Speak with a lender or financial advisor to get professional guidance on loan terms, eligibility, and the application process.

If you have any questions or would like some additional insights, we’re always here to help. Please feel free to reach out to us to learn more about your small business financing options.

^{This content is provided for general informational and educational purposes only and is not intended as financial, legal, or investment advice. Individual circumstances may vary. For guidance specific to your situation, please consult a qualified professional.}