Revolving Business Lines of Credit vs. Loans
They both come with their own lists of benefits that help nurture growth. However, the ways they work to accomplish the same goals make them more different than they are similar.
- Business Lines of Credit vs. Loans: Differences and Similarities
- Revolving Credit Lines vs. Loans: How Do They Work?
- APR vs. Factor Rates
- Business Loan vs. Business Line of Credit with No Personal Guarantees and Collateral Requirements
- Alternative Financing: Business Lines of Credit vs. Loans
- Business Lines of Credit vs. Loans: Which is Best for You?
Business Lines of Credit vs. Loans: Differences and Similarities
Let’s explore some of the differences listed above deeper.
Revolving Credit Lines vs. Loans: How Do They Work?
Revolving business lines of credit work very differently than business loans.
With both options, you borrow a certain amount of capital, which you pay off gradually within a certain period of time.
This is where the similarities end.
Revolving business lines of credit come with – you guessed it – revolving terms. Here’s how a business line of credit works:
- You receive a credit line with a maximum amount to draw from.
- Draw out only as much capital you need at a time.
- You can choose to replace the money you withdrew back into your credit line.
- The amount you replace becomes immediately available in your credit line again.
- You can then repeat this process as much or as often as you like.
- The funds you do not use you are not pay interest on, and will always be available to you.
- If you need more funds after using your credit line, you can request an expansion. In these situations, your credit line is able to grow as your business grows, giving you control over how much funds you’re able to draw from as you adapt to changing financials and business goals.
This reduces risk of overborrowing and overspending, as you only pay for what you use. They also lead to a lower cost of capital, and lower interest rates than most business loans.
We will explore these detail further in the section below.
But first, here’s how most business loans work:
- You are given a maximum amount of capital to use.
- All of the capital given must be used within a certain period.
- Interest rates are fixed and must be paid by pre-determined due dates.
- Once the loan is paid off, the capital replaced cannot be replaced.
- If you need more funds, you must take out an additional business loan.
APR vs. Factor Rates
Revolving business line of credit rates differ drastically from business loan rates.
Business lines of credit follow annual percentage rates (APR). This type of rate is represented as a percentage which is calculated based on the amount of funds used over a year.
This is different from factor rates, which are the most common types of rates offered by small business loans.
Factor rates are “fixed” in that they are determined before the borrower receives access to funds. This is different than APR rates, which can change depending on the amount the borrower withdraws within a year.
If you’re looking for the lowest-cost financing option, revolving credit lines may be your best bet. With a revolving business LOC, you can plan ahead and determine the size of your APR rates based on how much you choose to draw.
With the fixed factor rates of a business loan, you may or may not benefit from a predetermined interest rate before borrowing. Speak to a Business Financing Advisor to learn which option is best for you.
Business Loan vs. Business Line of Credit with No Personal Guarantees and Collateral Requirements
Most business loans require a personal guarantee and collateral leveraging. This is called “secured” financing.
Business lines of credit do not. This is an “unsecured” financing option, as lenders do not have their lended capital “secured” with some sort of collateral leveraging.
But what does this mean in terms of differing qualities of financing?
Leveraging some form of collateral and providing personal guarantees are a great way to make banks and traditional lenders feel safe in their transactions.
Business owners have the ability to provide a personal guarantee and collateral to be leveraged, then chances are your lender will give you financing options with much more agreeable terms compared to those that do not.
This results in the stigma of business LOCs generally offering worse terms than business loans. While this may be true in traditional lending practices, this is not true through alternative methods of financing.
Alternative Financing: Business Lines of Credit vs. Loans
The new field of alternative business financing offers revolving credit lines with terms that are oftentimes just as suited to a business owner’s needs if not more so compared to business loans.
Alternative methods of financing also allow for specialized business loans unique in their requirements and terms.
Options include business loans that do not require collateral in the form of real estate or personal assets.
Instead, required types of collateral can include assets that are not personal or real estate assets.
These options include accounts receivable financing, in which customer payments are leveraged instead of business or personal assets, and merchant cash advances, in which a portion of future customer sales are leveraged in advance of a lump sum of capital paid up front.
Business Lines of Credit vs. Loans: Which is Best for You?
Every business is different, and so the answer depends on each business’s 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, contact our Business Financing Advisors a call at (877) 482-3008.
Or, if you figured out which financing option is best for you, fill out our 1-minute application to get started right away, and receive funds in as little as 24 hours.