Loan versus Line of Credit: Which is best for you?
Worn out from use, but still fully functional and clean, a home health agency in Phoenix’s offices were functional, but lacked the lustre of presentation. After decades as a stable and successful practice, they began to lose business to competitors with newer facilities.
When the owners went to their local bank for a loan, they were given the option of taking out a line of credit (LOC). That’s when the debate began — what would make more sense, a loan or a line of credit?
When it comes to financing your operating expenses, Loans and LOCs are similar to each other, but have distinct differences. Below is a quick introduction to the pros and cons of each.
You are almost certainly familiar with the way that loans work: you borrow a specific amount of money for a specific purpose with a pre-determined payback plan. Your payment – which is usually monthly, but can often be bimonthly, weekly or even daily – includes payment of both interest and principal. Once you pay off the loan, your relationship with the lender ends.
A Line of Credit (LOC) offers flexibility and control
A line of credit is a type of loan that offers borrowers more flexibility and control than a traditional loan. The amount of money you borrow, what you use the money for and the payback plan can all vary depending on your needs.
- Use the money for almost anything: Whereas a traditional loan usually must be applied to a specific approved purpose, like buying a home or business, a line of credit can be put toward almost any business purpose.
- Borrow more or less: A credit line can also be used at a borrower’s discretion, choosing to borrow more or less against the pre-determined maximum they can borrow. If a business owner is approved to draw down a LOC up to $500,000, she can choose to borrow all, none, or just a portion of it.
- Payment can vary: Repayment schedules are also more flexible with lines of credit. Instead of the rigid monthly payments required by traditional loans, repayment amounts can vary with a LOC.
Pro Tip: A Revolving Line of Credit offers even more flexibility
A Revolving Line of Credit (RLOC) means that the borrower has access to credit even if the original line of credit is paid down. A borrower also has the option to draw down or repay funds as they choose. In contrast, a loan is for a fixed amount and closes once it is paid down.
time. For instance, if a hospice wanted to expand its facility, it might open a million dollar LOC. It uses $500,000 to cover the construction costs and leave the rest of the line open (or unused). Let’s say the hospice pays down the line to $400,000, but decides to borrow another $200,000 to invest in new staff and marketing. The hospice could increase the amount they borrow to $600,000 without having to go through underwriting again.
Given its long track record, the Phoenix home health company felt confident about its application for a LOC at its regional bank. Unfortunately, the credit line was small and the bank required the company to provide personal guarantees from its owners. The owners decided to keep looking for options. Lucky for them, they found Inspira. With Inspira’s help, the home health facility successfully renovated and expanded their offices.
Inspira offers 3 year RLOCs
Inspira offers 3 year revolving lines of credit exclusively to physicians, medical offices, hospitals and healthcare agencies. These lines of credit are based on the practice’s Accounts Receivable from Medicare, Medicaid and other health insurers. Inspira does not require a personal guarantee or other forms of collateral. Lines of credit range from $250,000 to $5 million, and the funds can be put toward any business expense.
Inspira also offers Instant Lines of Credit (ILOC) to companies that need cash quickly. This line of credit is also based on the healthcare Accounts Receivable, but the amount of money a company can borrow is limited to under $250,000. The money can be available within just a couple of days of completing the process.