Are you a trucking business owner looking for financing? With so many options available, it can be challenging to determine which one is best for your trucking business.
In this article, we’ll examine the line of credit vs loan question and explore the differences between the two. We will also look into different financing options so that you can find an option that may be a good fit for you.
What is a line of credit?
A business line of credit (LOC) is a flexible loan from a lending institution with a pre-set spending limit. Much like a credit card, the borrower can use the funds as needed. The debt may be paid immediately or over time with interest.
There are a few important points to keep in mind:
- You only pay interest on the amount you spend
- You can draw on a line of credit as often as needed until you hit the spending limit
- Interest rates and lender fees vary
What is a line of credit used for?
The most popular reason for a trucking company to obtain an LOC is to gain immediate funding for operational needs. They’re particularly useful for newer companies needing help with small expenses as they establish their customer bases.
With funding from a line of credit agreement, you can:
- Cover fuel expenses
- Purchase office supplies
- Make lease payments
- Maintain your fleet
- Cover payroll
- Join industry associations and attend networking events
- Have a “safety net” available in case of unexpected expenses
Example of how a line of credit works
Let’s say your bank extends a $50,000 line of credit to your trucking company.
To help get your company off the ground, you spend $10,000 on back-office technologies, supplies and equipment. You then pay interest on just the $10,000, with the remaining $40,000 still at your disposal.
One of your trucks suddenly needs an unexpected $5,000 repair before going out on another job. Fortunately you can pay for the repair from the line of credit, even with the initial $10,000 still outstanding. And you only pay interest on the exact amount that your company borrowed.
What is a loan?
A bank loan is a lump sum of money borrowed at a fixed interest rate. With a loan vs line of credit, you receive the full amount at once and start making payments with interest immediately. Perhaps the biggest difference between a line of credit vs loan is that a loan is repaid over a set term.
The most common type of loan is a traditional, bank-originated small business administration one. Visit the U.S. Small Business Administration website to find a local lender that offers SBA-back loans.
What is a loan used for?
A trucking business loan can offer your company access to much-needed capital. Banks typically approve them to be used for a specific purpose, but that purpose may vary. For example, funding may go toward:
- Trucks or equipment
- New construction or renovations
- Real estate
- Technological upgrades
- Working capital
- Business acquisitions
- Staffing
- Marketing and advertising initiatives
Loan considerations
When shopping around for a loan, there are several factors to compare.
- Term length – How long do you have to repay the loan?
- Prepayment penalties – How much are early payoff penalties? Can you make partial payments without penalties, and if so, what’s the limit?
- Fees – Are there any setup or account-based fees to be aware of? What happens if you make a late payment?
- Monthly payment average – How much are the monthly repayment installments? How much goes toward the principal vs interest and fees? Make sure that the amount is low enough that you aren’t stressing over operating expenses each month.
- Total cost of capital (TCC) – What’s the total cost of interest and fees over the entire repayment term?
Make sure you compare apples to apples when evaluating lenders. And don’t assume that similar terms mean the same thing.
For example, an annual percentage rate (APR) is different and perhaps more useful than an interest rate. It takes into account interest and lender fees over a year, providing a more accurate reflection of total loan costs.
Line of credit vs loan
If you’re looking for flexibility and ease of access to funds, a line of credit may be the better option. This is especially true if your business is experiencing fluctuations in cash flow or you’re concerned about affording unexpected expenses.
On the other hand, if you have a specific financing need, a business loan may be better. Loans typically have a lower interest rate than lines of credit, which can save you money in the long run.
Both a line of credit and a loan can provide valuable funding options for your trucking business. Carefully consider your needs and financial situation to determine which is a better fit. And make sure to compare rates and terms from different lenders to ensure you’re getting the best deal possible.
Qualifying for a line of credit vs loan
The process of qualifying for a line of credit or loan will involve a careful study of your assets and credit. Lenders will consider, for example:
- Your business’s credit report to assess the risk of lending you money
- How long your company has existed, since most lenders favor applicants that have been around at least two years
- Whether you meet minimum monthly revenue requirements
The application process can be a bit tedious. Carefully examine the list of required documents to ensure you have everything the lender needs.
And if you’re worried about qualifying, take a breath; the only way to see if you qualify is to try. Be patient if you’re just starting out, and remember that alternative lenders are typically more flexible than traditional banks with easy qualification requirements and fast funding solutions.
Make informed financing decisions
By making informed decisions and focusing on long-term growth, you can build a successful trucking operation that delivers results. Financing may feel risky, but in many cases, it’s the best way to fast-track your business strategy.
Do yourself a favor by looking for alternative lenders who specialize in providing flexible financing solutions to the trucking industry. Consider their reputations, customer service capabilities and whether they offer access to any industry-specific expertise and resources.
Finally, keep in mind that obtaining financing is just one part of building a successful trucking business. It’s also important to have a solid business plan, maintain good records and keep abreast of industry trends and regulations.
FAQ
Credit requirements are usually more stringent for loans than lines of credit. On the other hand, loans are typically offered with lower interest rates than lines of credit.
Business lines of credit are typically opened to cover relatively small, short-term operational expenses. Examples include office supplies, utilities and equipment lease payments.
It may be easier than you think. Lenders consider your credit history, how long you’ve been in business and whether you meet monthly revenue requirements. Traditional banks usually prefer companies that have been around for at least two years, but alternative lenders are more flexible.
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