This blog post was last updated on March 31, 2021 to include new information about business lines of credit vs. loans.
Comparing a business line of credit vs. loan is like comparing apples and oranges. They both give your business cash to accomplish a goal and come with their own lists of benefits. However, their structure and role in driving your business growth make them more different than they are similar.
If you’re debating between a line of credit vs. a loan, there’s no clear answer as to which is better for your small business.
Understanding the differences and similarities between a business line of credit vs. loan can help you determine which solution is best for your needs. Here’s what you need to know.
Essentially, small business loans are lump sum financing products. They’re typically used to finance large, one-off purchases or investments. A business line of credit, on the other hand, gives you more flexibility, especially when it comes to managing unexpected expenses or meeting ongoing needs.
Here are some of the key differences between a business line of credit vs. loan.
A business loan is a lump sum of capital offered by lenders. Small business loans require you to pay back your principal plus interest over a set period of time, which is determined in the initial agreement.
You will be given a set amount of cash, which you must repay within a set timeframe. Business loan payments usually follow a predetermined schedule, ranging from daily to monthly. You’ll most likely have to start making repayments immediately after receiving financing.
Depending on your needs, goals, and financials, you can qualify for a number of different types of loans. Some short-term business loans, especially those intended to drive revenue, feature a 6 month to 24 month repayment term. Other business loans have longer terms and can be repaid over several years.
Depending on the lender and your specific qualifications, you may also be asked to put up collateral in order to secure your business loan.
Business loans are best for financing specific, one time projects. You can use a business loan to expand operations, open up new locations, purchase equipment, buy real estate, or pursue other growth opportunities. In other words, most small business owners seek loans when financing large, planned expenses, rather than in one-off transactions.
In some cases, your lender may ask how you’re planning to use the loan before approving your application. If you’re applying through a traditional lender like a bank, be sure to prepare a detailed business plan. Most online lenders like National won’t request a business plan as part of the application.
A business line of credit allows you to borrow money up until a set amount, or your credit limit. In this way, a business line of credit works similarly to a credit card. When you apply, lenders will grant you a set credit limit, which you can draw upon as needed.
You’ll only have to pay interest on the amount of money you use.
Many small business lines are revolving. As you repay the balance, your credit limit will be replenished. This means you can continue to draw from it up until your new credit limit, without reapplying or receiving approval.
A small business line can be secured, or backed up by collateral. It’s also possible to obtain an unsecured line of credit.
You can use your small business line to cover ongoing expenses like payroll, seasonal disruptions, unanticipated charges, and even finance new opportunities. Many small business owners will also keep a line of credit as an emergency fund or safety net.
Small business loans and lines both allow you to borrow a certain amount of money and pay it back within a set timeframe. They’re both great tools to grow your business as you need more working capital. However, this is largely where the similarities end.
There are several major differences between a business line of credit vs. loan. Understanding these factors will help you decide which financing solution is best for your business.
Well, which is better for your business?
Deciding between a business line of credit vs. loan essentially comes down to a few key factors. Before choosing, you’ll want to consider the amount of money you need, flexibility, and how you plan to use the funds.
A small business loan is best for financing one-off, specific expenses. Some examples include buying inventory, expanding, or pursuing new growth opportunities.
If you prefer to have a fixed monthly payment on a predetermined schedule, a business loan would be a good choice. Because the payback amount is fixed, you’ll be able to budget out your future expenses with greater accuracy than you would with a business line of credit.
If you’re looking to secure more funds or finance a long-term project, a business loan may be your best choice.
On the other hand, if you need extra cash to cover sudden costs like hiring, marketing, or covering operating expenses during seasonal lulls, then a business line of credit might be the best choice for you.
A business line of credit may also be the better long-term choice. You can draw funds up until your credit limit to cover cash flow disruptions or even emergencies. You also won’t have to make payments until you borrow the money.
Between a business line of credit vs. loan, both are sound financing solutions, that best serve business owners in different situations. Ultimately, the answer depends on your specific business model and goals for growth.
Finding the perfect financing option for your business can be a long and laborious process. To save yourself time, and get expert financial advice on how to move forward, apply for financing through National.
After applying, a knowledgeable Business Financing Advisor will explain your options to help you choose the right one for you.
National Business Capital & Services is the #1 FinTech marketplace offering small business loans and services. Harnessing the power of smart technology and even smarter people, we’ve streamlined the approval process to secure over $1 billion in financing for small business owners to date.
Our expert Business Financing Advisors work within our 75+ Lender Marketplace in real time to give you easy access to the best low-interest SBA loans, short and long-term loans and business lines of credit, as well as a full suite of revenue-driving business services.
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Megan is passionate about helping business owners along their journey - providing them with relevant content they can use in their day-to-day operations.