With banking it’s important that our loans match the timeframe. In other words:

One of the best ways to explain this can be using a home example. Suppose you want to buy a car when you don’t have enough money to pay for the car with cash. One option might be to increase your mortgage or use your line of credit to make a payment towards the car. However, the problem is that your mortgage or your line of credit may have 15 to 30 year terms. The car, meanwhile, may only last you three to five years. You’ll be paying for the car long after the car is done.

A better solution in this example would be to take out a loan, like a car loan, that would be matched to the life of the vehicle or for how long that you intend to have it. Of course, this ignores some of the impact of taxes and some of you might want to use a line of credit and get an interest deduction for tax purposes (of course, check with your tax advisor on this). However, putting taxes aside, you’re better off with a term loan, in other words an auto loan. In this case, if you do go with a line of credit route it would be very important to put discipline in place so you pay the loan off on a very short-term time period just like it would be as if you’d used an auto loan. That way when you’re done with the car the money you took out on your home equity loan for the car would be paid off.

That’s a personal example I mentioned, but it can be very applicable on the business side. One analogy can be line of credit financing can be like the home equity. Meanwhile, there can be auto loans or term equipment loans or other term loans that can be applicable to term loans. Suppose you had some machinery you purchased. Ideally, you should use a term loan or some short of lease that would match the expected time period for the equipment. You could use maybe some extra funds from line of credit financing towards it, but the you’d be cutting down your availably of funds for other short-term funding purposes.

Similarly, suppose you need some financing to cover accounts receivable and instead you took out a long-term loan instead of using a line of credit. Like the car example, you’ll be paying for that loan long after the accounts receivable has been collected and received.

So take a look at your funding that you currently have and how it matches up with your asset base. Is it in balance or do you need to restructure? And if you have additional needs going forward, pick loans that match the timeframe on what you need before. By doing so, you’ll save yourself a lot in interest costs over the long-term plus maintaining more availability of capital for the particular need that you have whether they’re short-term or long-term purposes.