Line of Credit vs. Term Loan: Guide for Entertainment Businesses

If you work in the entertainment industry, you know one thing: the show must go on. Whether you’re staging a new theater production, live concert, or dance performance, or filming a movie or commercial, it’s going to happen one way or another. While you manage the many moving parts and talent, one thing you may also need to figure out is how you’re going to finance it all.

Small business owners in the entertainment industry can look into various financing and loan options. Two options to consider are a business line of credit and a term loan. But which one is better for your project? In this guide, we look at a line of credit vs. term loan to help you navigate which option will best suit your needs.

Article Summary:

• The entertainment industry has many ongoing and large upfront expenses.
• A business line of credit and a term loan are financing options to help cover costs.
• There are major differences and pros and cons when comparing a line of credit vs. term loan.

What is a Line of Credit?

A business line of credit is a financing product that is structured more like a credit card than a traditional business loan. Here’s how business lines of credit work:

• You apply for a business line of credit
• You receive a credit limit amount (for example, $50,000)
• As a borrower, you’re able to use the funds up to the borrowing limit
• Interest applies on the amount used, not the total credit limit
• You make monthly payments
• While the credit line is open and you pay down the balance, you can reuse the available funds

Like a credit card, a business line of credit is revolving. That means it carries over month to month and you can increase your available credit by paying down your balance. Because of this structure, lines of credit are appealing as they offer ongoing access to funds with major flexibility.

For those in the entertainment industry who have fluctuating business needs, this can be a useful borrowing tool. Typically, you can apply for a business line of credit at financial institutions, banks, and credit unions.  Looking at a range of business line of credit options can help you decide.

What is a Term Loan?

A business term loan is a type of financing that provides borrowers with a lump sum of money. The loan amount is repaid in installments over a set repayment schedule. Term loans often have fixed interest rates. Because of these factors, term loans provide predictability. You know what you’re paying, for how long, and can budget for it.

You can typically get a larger loan amount with a term loan than with a business line of credit. If you’re in the entertainment industry and working on a project with significant costs, term loans are useful. You can get term loans from a bank or financial institution, or a business financing lender online.

Line of Credit vs. Term Loan Considerations

When comparing a line of credit vs. term loan, it’s key to understand the major differences and the nuances of how each financing option works. However, note that each situation can vary widely and it’s best to read all terms and conditions of any loan agreement.

Here we take a look at various factors that impact the cost of borrowing and how repayment works.

Now that you’ve seen the line of credit vs. term loan features at a glance, it’s key to review the pros and cons as well.

Line of credit pros:

• Provides revolving credit
• Flexible repayment
• Can help cash flow and pay for unexpected expenses

Line of credit cons:

• Variable, higher interest rates
• Credit limit may be a smaller amount of money
• May be more difficult to budget for repayment

Term loan pros:

• Provides lump sum funding upfront
• Predictable monthly payments
• Fixed, lower interest rates

Term loan cons:

• Not as flexible as a line of credit
• May require collateral
• Borrowers may need to meet stricter eligibility requirements than a line of credit

Examples of How to Use These Financing Options in the Entertainment Industry

The entertainment industry is multi-faceted. When deciding between a line of credit vs. term loan, it’s important to look at the “how” and the “why.” In other words, how will you use the funds and why do you need them? The answers can shed light on which option is best for you. Here we provide some examples of how a line of credit and a term loan can be used in the entertainment industry.

Line of credit:

• You have a theater or venue that needs ongoing funds for cash flow
• You’re in pre-production for a film and have fluctuating expenses at each stage of the process
• You’re producing a live show and need cash flow flexibility for the season
• You have a recording studio and are finishing an upcoming album
• You need to book rentals and have a gap until ticket sales revenue hits

Term loans:

• You need to finance new equipment for a production
• You’re looking into commercial real estate to build out or acquire a rehearsal space or venue
• You’re financing a feature film or music tour
• You’re creating a recording studio
• You’re paying talent like performers, directors, and producers

These are just some examples of how these financing options can be used in the entertainment industry. For your particular situation, when comparing a line of credit vs. term loan, think about the amount needed, the time frame, and whether you’re paying for a large one-time project or something that’s ongoing.

Also, review your current and projected cash flow and repayment schedule. While these financing options can be helpful in the short term, you want repayment to be viable in the long term as well.

Applying for a Line of Credit or Term Loan

After weighing the pros and cons of a line of credit and term loan, you may have an idea of which option will best suit your entertainment business. To take the next step, here’s an overview of how to apply for these financing options.

• Research lenders: Check out several lenders that offer the financing product you’re looking for. Some may specialize in lines of credit, whereas others focus on term loans. Find lenders that align with your needs and evaluate the eligibility requirements. To get a fair comparison, review the interest rates, repayment terms, and any potential fees.
• Get documents in order: Once you choose a lender, prepare documents for your application. Lenders typically review your business finances to ensure you have the ability to repay the loan. You may need to gather your tax returns, cash flow statements, profit and loss statements, etc. It’s smart to check your personal credit score and business credit score as well to make sure you’re in good standing and meet the eligibility requirements.
• Submit application: After preparing your supporting materials, go through the application process. Fill it out completely and provide as much information as possible. You may be able to do this online.
• Receive funding decision Submitting your application kicks off the process. Ideally, you get the news that you’ve been approved for a line of credit or term loan. Once that happens, you can receive your funds. It’s important to note that application processing times and funding timelines can vary significantly between lenders.

Final Thoughts

When evaluating a line of credit vs. term loan, it’s important to review your short and long-term needs before you borrow money. How you intend to use the funds can play a major role in your decision. If you need working capital to manage your cash flow while you prepare for a new show or project, a line of credit may be ideal. If renovations are needed in your rehearsal space or you need to make a large equipment purchase, term loans may be the better fit.

Compare various lenders to help find the most competitive rates for your small business. Typically, lenders will consider your creditworthiness, annual revenue, time in business, and other factors when determining your eligibility. Whether you go with a line of credit or a term loan, it can help you access funds to pay for talent, cover venue costs, or launch a new show or film.

FAQs About Line of Credit vs. Term Loan

If you're interested in learning more about small business loans, here are frequently asked questions about comparing a line of credit vs. term loan.

What is the Difference Between Term Loan and Line of Credit?

The main difference between a term loan and a line of credit is that term loans offer funds upfront and a line of credit provides revolving funds. When evaluating the type of loan or financing, look at minimum credit score requirements and how repayment will affect short-term cash flow.

What Happens if I Get a Line of Credit and Don't Use It?

If you don’t use your business line of credit, you may not have interest to pay on a balance. However, your lender could charge inactivity fees. It’s important to review the fine print.

When Comparing Line of Credit vs. Term Loan, Which Is Better for Your Credit?

With both lines of credit and term loans, you may be able to establish and build business credit history with on-time payments.

What Are Important Considerations When Comparing a Line of Credit vs. Term Loan?

Borrowers should look at interest rates, loan amount, repayment schedule, fees, and eligibility requirements when comparing a line of credit vs. term loan. Additionally, evaluate your loan purpose and whether you need funds for something specific or have ongoing needs.

What Are Pros and Cons of a Business Term Loan vs. Line of Credit?

When comparing term loans vs. line of credit, it’s key to evaluate the pros and cons. Lines of credit offer flexibility and ongoing access to funds but may have higher interest rates and lower borrowing limits. Term loans provide upfront funds on a fixed repayment schedule and may require borrowers to meet stricter requirements and potentially provide collateral.

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