The two most common and traditional sources of financing are fixed term loans and lines of credit. With a loan both the lender and the borrower know exactly what they are committing to. The lender will predetermine the terms such as ratesand amortization period which allows the borrower to make an educated decision based on monthly payments and all other factors required for making a sound long-term financial commitment. On the other hand, the line of credit is basically access to cash on a need basis. The term is flexible with minimum monthly payments on the drawn portion based on variable index rates such as the Libor and the U.S. treasuries. Some lines have a feature which allow the borrower to lock the rate and fix the term of the loan upon withdrawing cash, but that’s not the norm.
The cross roads of making a decision between a line of credit and a loan can be a difficult one to deal with. Few of the most important factors you have to consider are:
Do you need all the money right now for a onetime expense?
Is this an on-going periodical expense?
Is the money for security of knowing you have access to cash?
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