When To Switch Between Fixed/Variable Lines Of Credit

Banks that provide fixed lines of credit business loans to small businesses often make loans for single purchases and offer loans with set terms and rates. There are other business financing options available to consider; variable rate business lines of credit.

Business Term Loans versus Lines of Credit

A conventional business term loan is made to small businesses for an individual purpose or purchase. For example, you can use business term loans to pay for expensive capital equipment or purchase vehicles that are used in your business’s operation. A fixed rate business term loan is usually set at a fixed interest rate and is amortized over a fixed payment schedule. Most business term loans have a maturity date range between 1 year and 7 years. For larger loan amounts, the bank may extend term lengths up to 20 years.

On the other hand, a business line of credit is a pre-arranged loan amount that is always available for the small business when it needs it. Your small business can withdraw as little, or as much, from the line of credit as the business requires. If you make withdrawals from your line of credit, you are only required to pay interest on the amount of money that is actually withdrawn and used. Like term loans, business lines of credit can be used almost for any purchase or purpose.

Interest rates for business lines of credit are usually variable rates that change over time. Generally speaking, interest rates associated with a business line of credit are generally closely tied to the bank’s prime rate of lending and fluctuate depending on market conditions.

When To Consider Variable Rate Lines of Credit

Conventional term loans generally offer a an overall lower interest rate than variable-rate business lines of credit, but they are not nearly as convenient or easy to use. The way that a business line of credit is designed makes it a much better option for many types of financing needs. For example, with a line of credit you are always free to negotiate better pricing terms on inventory or other needed equipment and don't need to worry about being approved for a term loan to cover the cost.

There are many ways that a variable-rate business line of credit can help your small business; however, the most important way that it can help is the fact that you always have financing on hand and immediately available. As with any other type of financing, you should be careful when using your line of credit and should always carefully consider your decisions to make credit purchases.