NOT ALL FINANCING IS EQUAL!

"The goal isn't more money. The goal is to live life on your terms" -

- Chris Brogan

We hope you’re having a good summer. The Bank of Canada has reduced the bank rate by 0.25% twice this year – 0.25% on June 5th and 0.25% on July 24th. The market is starting to see interest rate relief for the first time since February 2022.

Year-to-date DEROTTO has given away $22,500 in gas gift cards - Thanks for the trust and support. To learn more about DEROTTO’s gas card program click Earn Gas.

This month we are going to address the difference between a line of credit and a term loan. At DEROTTO we have a saying “Not all financing is equal” and nothing illustrates this point more than a line of credit and a term loan. Yes – both are financing, but both have fundamentally different purposes. Understanding the difference is key in cash flow management.

Don’t use the wrong financing tool for equipment financing!

it’s important to understand how equipment term loans and lines of credit work. DEROTTO constantly comes across businesses that have a misunderstanding of how to use a line of credit and subsequently, this puts a business in a bind.

Equipment Term Loan

With an equipment term loan, a business borrows money for a piece of equipment for a specific period of time, with a fixed interest rate and an agreed upon payment schedule. Debt consolidation is another example of a term loan.

Business Line of Credit

A business line of credit generally refers to a revolving credit line that allows a business to draw funds as needed, up to a predetermined credit limit. A business pays a line of credit by making regular payments against the outstanding balance. Interest is only charged on the amount borrowed and the interest rate is typically a floating rate. The main function of a line of credit is to cover ongoing operational costs or manage cash flow fluctuations.

Where a business gets into trouble is when a line of credit is used for debt consolidation or to buy significant purchases, such as a vehicle, excavator, large software upgrades, CNC machine, etc. Since a line of credit is most effectively used for day-to-day operations, having a large portion tied up with a big purchase can put a business in a cash flow crunch because it doesn’t have access to money.

Preserving capital reserves is always important in business. At DEROTTO, we believe we are entering a period in the economic cycle where having access to capital reserves is very important.

Businesses that use term loans for long term investments, while relying on lines of credit for short term working capital needs, will help a business maximize its ability to manage cash flow.

If you’d like to chat about this topic or have other questions, please don’t hesitate to call Darryl or Jayce. DEROTTO looks forward to being of service to you and your business in the future.