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Commercial loans vs. lines of credit

No matter the size of your business, you need the right financial support to make things happen. From purchasing a new office for your expanding team to paying for the emergency repair or investing in inventory, fiscal agility is crucial to your long-term success. To provide your company with the ability to make the short- and long-term investments needed, it’s important to understand how to leverage commercial loans and lines of credit. If your credit is not looking good, you might consider this lender who does not check credit.

Loans vs. lines of credit – what’s the difference?

In theory, loans and lines of credit serve similar functions. In practice, the two  are very different. While they may work hand-in-hand, it’s important to understand their unique functions.

  • Commercial loan: Also commonly referred to as a term loan, these can be described as any type of loan given to an operating company to cover business expenses, including real estate, equipment, machinery, construction and more. These loans are granted in a specific amount, and repayment of the loan plus interest happens over a fixed term.
  • Line of credit: Tied to the working assets of the company – such as inventory, accounts receivable, etc. – to provide businesses with access to cash to cover expenditures. Like a credit card, businesses make ongoing payments to pay off the balance, only paying interest on the funds that you borrow rather than on the full amount of the credit line.

Making loans and lines of credit work

While your business banker can work closely with you to define when each product is appropriate, it’s important to have a basic understanding of how you might use these options as you’re planning for the future.

The largest difference between loans and lines of credit is simple: specificity. Commercial loans are tied to a specific action or goal that is defined at time of application – purchasing new property, acquiring a new company, buying new equipment for your business. Conversely, lines of credit can be opened without a specific action in mind, and are used on an as-needed basis to facilitate the timing of cash within your business – whether that’s to pay wages, or cover other expenses in the absence of available cash flow. Ultimately, to understand how to make each of these work for your business, you must first determine the business need.

Getting started

With an understanding of how to make both a commercial loan and line of credit work for your business, beginning the process is as easy as reaching out to your business banker. To apply, you’ll need:

  • Three years of business financial statements and tax returns, plus current year-to-date statements
  • Personal financial statements and tax returns
  • Records of any additional owned businesses

With this information in hand, and an understanding of your short- and long-term needs, your business banker will direct you to the right support for your business.

Citizens Bank provides information and resources for businesses on our website. See more in our Business Hub.

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Jim Bodendorfer joined Citizens Bank in 1999 and has 30 years of commercial lending and business banking experience. A specialist in business development, he enjoys helping his clients explore their full potential and connecting them to the resources needed to grow and prosper. Jim is a graduate of UW–Oshkosh and the UW Graduate School of Banking, and is a member of the Big Bend/Vernon Lions Club.

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