Asset-Based Lines of Credit Versus Term Loans: What’s the Difference?

Let’s say you need to cover operational expenses during lean cash periods, or you want to develop a new product that requires research, development, and marketing. In alternative funding, asset-based lines of credit and term loans could provide a solution for those scenarios but each is tailored to different needs and serves a distinct purpose. Which is suitable for your business and circumstances? The key differences between these two types of loans can help you make an informed decision that aligns with your company’s goals.

What is an Asset-Based Line of Credit?

An asset-based line of credit is a flexible business financing option secured by a company’s existing assets, including accounts receivable (A/R), inventory, and possibly equipment. These assets determine the availability across the line of credit. At Primary, the limit is generally 80% to 90% of a business’s outstanding A/R and possibly an additional amount against other assets.

When Do Businesses Use Asset-Based Lines of Credit?

Asset-based lines of credit are similar to credit cards in that you can borrow up to a specific limit, repay, and borrow again up to that limit. They’re typically suitable for businesses with short-term capital needs or fluctuating cash flows that need funds to keep operations running smoothly. For example, a business awaiting payments due to extended customer payment terms or a company with peak seasonal sales may use an asset-based line of credit to meet short-term obligations, such as purchasing more inventory, fulfilling payroll, and meeting standard operating expenses.

Is an Asset-Based Line of Credit Right for My Business?

Does your company generate accounts receivable and need flexibility for short-term capital needs? An asset-based line of credit may help. At Primary, we look at your circumstances to provide options that fit and most importantly, benefit your business. Asset-based lending allows us to offer a combination of solutions based on your available A/R, inventory, and possibly your equipment to meet your needs. Our personalized approach to your current situation can help us find a creative solution that fits your company.

What is a Term Loan?

For unique financing opportunities that don’t fit the traditional factoring profile, term loans can be a great alternative to help support growth opportunities outside regular operating expenses. Like conventional loans, with term loans you borrow a fixed amount of money and repay it over a specific timeframe. Term loans from an alternative lender often have flexibility in loan amounts, repayment terms, and interest rates. 

When Do Businesses Use Term Loans?

Businesses often use term loans for larger investments or long-term projects that will increase topline revenue and ultimately increase profitability. For example, a company may secure a term loan to buy equipment, expand the business, or pursue a project that has a long-term impact, helping take it to the next level.

Is a Term Loan Right for My Business?

At Primary, we work to understand the growth opportunity and determine if a structured approach aligns with your company’s needs. Considering factors such as cash flow, business performance, and industry-specific circumstances allows us to tailor loan solutions to meet your business’s specific requirements, unique situation, and goals.

Choosing the right type of business loan is a crucial step in your company’s financial health and growth. Working with a trusted lender and understanding the differences between these two types of loans can help you better evaluate factors like interest rates, repayment terms, and the loan’s purpose when deciding. Whether you need short-term working capital or are ready for a significant expansion, there are alternative financing solutions that meet your business’s goals. Contact our team to discuss your needs and explore your options.