oan or Line Of Credit…Which Is Best For Your Company?
In essence, both are loans acquired from a lending institution for specific purposes and under specific terms of repayment. Ultimately, the bank is in the business of making loans of one kind or another. The bank earns its profits from the fees and interest charged for the loans that they make. The bank’s customers need the loans to fund a variety of different activities associated with their many and varied needs.
That phrase, “many and varied needs” tells us why the bank offers many different kinds of loans. We are not all in the same financial circumstances. We do not all have the same financial needs. We certainly don’t all have the same business models or credit history. Over a period of centuries, the banks have developed thousands of different types of loans to meet a near infinite variety of needs and circumstances.
Two major divisions in these many different kinds of loans are “loans” and lines of credit. Fixed rate loans with a set period of repayment are probably the oldest loans that humans have developed.
There are records of these loans for fixed periods and interest rates written on clay tablets dating back more than 4,000 years.
Most of us understand how loans work. The bank gives the borrower a set amount of money and the borrower later returns the money at an agreed upon date plus a little interest to repay the bank for their investment. Modern loans are typically paid back in regular monthly or weekly installments.
A line of credit works is a lot like a standard loan. The bank makes a certain maximum amount of money available to the borrower. The borrower is free to draw upon that money up to the maximum for a period of time. If the borrower does draw upon the money the bank makes available, then the borrower will repay the money with interest according to the terms of the contract.
The most common types of loans in the modern world are home mortgages and car loans. The most common lines of credit are credit cards. When a business knows exactly what it wants, how much it’s going to cost and where to go to get it, then a loan is often an appropriate solution. The key is that loans are made for specific, identifiable requirements.
On the other hand, some expenses are just as important but much more difficult to predict.
Let’s face it…none of us have a crystal ball!
A business could take out a line of credit, even a credit card, to cover short term, regular office expenses, fuel expenses on trucks or other essential and variable requirements.
The last important difference to understand about loans and lines of credit is that even for entities with excellent credit, loans tend to be less expensive than lines of credit. The reason is simple.
A loan is usually carefully planned, and every element of the purchase and proposed use is verified by the lender before the money is released. The lender has specific protections in place to ensure that the money lent is used exactly the way both parties agreed that the money would be spent. This detailed knowledge allows the bank to calculate their risk with great precision and price their loans accordingly.
A line of credit by its very nature is much less predictable. While a business’s line of credit can have some very specific limitations and restrictions, in order to be useful, it must also be flexible. The bank is less able to predict its potential losses. In order to protect itself the bank charges interest and fees sufficient to maintain profitability in the less than optimum circumstances.
Finally, loans and lines of credit both carry interest and require at some point one or more payments to discharge the loan. Each type of contract can be subject to different types of fees, like origination fees. Each of these loans can be extended or refinanced. The interest rates can be fixed or variable. These loans are part of a complex range of products that financial
services institutions have available to help you and your business be profitable, successful and secure.
VeoGlobal is a premier financial services company. We have over 20 years’ experience in the US and Canada helping businesses like yours obtain the capital and financial services they need through loans and services tailored to their specific needs.
VeoGlobal is a respected, established and reliable financial services business because we have never forgotten and never will forget that your success is our success. We want your business to be profitable and growing for decades to come. We want to be your first choice for all of your financial service’s needs.
VeoGlobal is ready right now to help your business succeed. We can provide a wide variety of financial services from a loan to your company for a few thousand dollars to supplying up to $20,000,000 or more a month in a variety of loans and services.
Always professional. Always ready. VeoGlobal – Your success is our success.