UNDERSTANDING THE DIFFERENT TYPES OF FINANCING FOR YOUR BUSINESS

There are a lot of things in the marketplace to be concerned about these days – geopolitics, what is the Bank of Canada going to about interest rates, domestic politics, labour issues, how to best manage my accounts receivables, etc. Managing your business through these challenging times is critical. One of the best ways to help manage your business is to understand the different types of financing.

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 day-to-day 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 and survive tough times.

DEROTTO has an extensive network of banks, credit unions and private lenders to provide equipment financing for businesses that are well established to start-ups, new equipment to used equipment, good financials to poor financials and strong credit to weak credit - DEROTTO can do it all. DEROTTO has spent years building an extensive network of lenders to be able to provide equipment financing for any situation that comes across our desk.

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 having an opportunity to be of service to your business in the future.