Term Loan vs. Revolving Credit Line: Which business loan is better?

Business Growth
June 28, 2022

When operating a business, you must be ready to seize growth opportunities and troubleshoot cash flow gaps as they happen. To stay long in the business, however, you must be able to make sound financial decisions, and adapt to changing market circumstances.

For both situations, you’ll need capital – which is not readily available to most small-to-medium enterprises (SME). In this case, a business loan is your best option. 

SME loans are generally divided into two categories: a term loan, also known as a fixed-term loan; and a credit line, also called a line of credit. Both have advantages and disadvantages, and what suits your business will depend on your goals, needs, and financial health.

KEY TAKEAWAYS
  • A term loan is a large lump sum loaned upfront. In exchange, you make monthly or quarterly repayments plus interest over a set period of time. 
  • Term loans are best for a large one-time purchase, investment or cash flow gap.
  • Term loans are more difficult to get, since it requires good business financials and a longer application process.
  • A credit line gives you access to a set amount that you can dip into whenever the need arises. You only repay the portion you used plus interest. 
  • You only apply for a credit line once. This is because when your dues are paid, your credit limit is replenished and you can borrow again.
  • Credit lines are good for funding short-term goals, operating expenses, and regular cash flow gaps.
  • First Circle’s credit line can also work as your emergency fund, since application is free and you only pay when you use it.

When do you need a term loan?

In the Philippines, term loans are the most common SME business loan from loan companies. It provides business owners a lump sum of cash upfront. The loan is repaid through scheduled payments over a set period of time, either with a fixed or variable interest rate. 

A term loan is best for funding a large one-time purchase, investment, or cash flow gap, since you’ll already know how much money you need to borrow. Investments where you can use a term loan include:

  • A new store
  • Large equipment
  • Buying another business or real estate
  • Paying off existing debt

To avail a term loan, lending companies require multiple proof of financial capacity, such as Audited Financial Statement (AFS), Income Tax Return (ITR), and bank statements. Some lending companies only accept applications from businesses in long-term profitable operations or large annual revenues.

With larger loans, you’ll be asked to provide collateral. A collateral is an asset that a lending company can seize from a business owner for failure to repay, such as owned real estate or vehicles.

Term loan applications can take a while to process. Expect at least a month before an update in your application, and more time before your funds are disbursed. Term loans may also come with origination fees and underwriting fees, which must be paid prior to accessing your funds.

Term loans are payable from one year to ten years. Depending on your loan agreement, you may pay monthly or quarterly, including interest rate and applicable fees. After paying off your term loan, you must complete a new application to get another one.

SMEs with large one-time purchases and good financial records will benefit the most from term loans.

When do you need a credit line?

A revolving credit line is a pool of money that you can dip into any time for any business-related expense. 

It works like a personal credit card: you can borrow any amount within your credit limit, then repay only what you use plus interest. Once your dues are repaid, your credit limit is replenished to its full value, and you can resume borrowing. 

For this reason, a revolving credit line is the better option for SMEs funding short-term goals, ongoing operating expenses, or regular cash flow gaps. It can also be an emergency fund for your business, because you can get most credit lines for free. You simply leave it untouched upon approval until it is needed.

Some situations that are better resolved with a credit line include:

  • Equipment repair
  • Fulfillment of new orders while waiting for delayed payments
  • Funding a new business opportunity
  • Paying employee wages during lean seasons
  • Increasing inventory for seasons with an influx of customers, such as Christmas or long weekends.

Credit line applications are processed faster, since it requires less documents and no collateral. At First Circle, you can hear about your application in as fast as 5 business days. Upon approval, you also won’t have to re-apply every time you use your credit, unless your account is deactivated from lack of use. 

One disadvantage is your business may not be able to get a high credit limit right away unless your business has consistent profits. To increase your credit limit, you must build a good relationship with your lender by paying your dues on time.

A credit line benefits SMEs needing small funds for temporary or unexpected needs and opportunities. Application is often free and the process is faster, making it an ideal business emergency fund.

How can First Circle’s Revolving Credit Line help?

Our Revolving Credit Line is a flexible short-term financing option that fills in the gaps in your cash flow, letting you focus on growing your business. Aside from securing your business, our credit line has the following benefits:

  • Exclusive account manager to provide hands-on guidance
  • Processing of applications in 5 business days
  • Two-document application requirement
  • Apply once and access up to ₱5 million of re-usable credit
  • Interest rates can go as low as 1.39% per month

First Circle is a multi-awarded lending company supporting SMEs since 2016. To apply for a Revolving Credit Line and other forms of business funding, you may contact us at support@firstcircle.com.

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