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Business Loans Vs Line of Credit

Business Loans Vs Line of Credit

Small business loans vs line of credit

Both small business loans and lines of credit let you borrow money whenever you need funding for your business. But, you can sometimes get confused between getting business loans or line of credit. In this article, we have discussed on small business loan vs line of credit and which one is best for you.

Small business loans

Small business loans are fixed amounts borrowed by a bank, alternative lenders or online lenders.  A small business loan can be secured where the collateral is needed against the loan amount and unsecured where no collateral is required. The amount borrowed can be up to 20M and can be paid over time generally with a monthly debit. 

Business line of credit

Line of credit is similar to getting cash advance from credit card whenever you need it. You can borrow money whenever you need up to the maximum limit, over a period of time. Generally, lines of credit don’t require collateral but you can get low-interest rates by providing one. You have to pay interest rates only on the amount you borrow not on the maximum limit. In order to get a line of credit for your small business, your credit score needs to be in very good condition.

Comparing small business loans and line of credit

 

Factors to Compare  Small Business Loans Business Line of Credit
Interest Rates Fixed interest rate Fixed or Variable interest rate
Withdraw Schedule The loan amount is borrowed all at once. The loan amount can be borrowed whenever needed up to a maximum limit over a period of time
Payment Schedule It can be paid monthly, quarterly or yearly over a period of time. During the draw period, payments are made based on interests. During the repayment period, fixed monthly payments are made.
Major Fees There can be the following fees:

  • Loan processing fee
  • Credit fee
  • Appraisal fee
There can be the following fees:

  • Initial processing fee
  • Fees associated with each withdraw
Loan Amount Higher loan amount up to $20M Lower loan amount up to $1M

table: small business loans vs business line of credit

 

When you need a small business loan?

  • When you are sure how much money your business needs.
  • You want a limited amount of debt.
  • You need to borrow a higher amount for a fixed interest rate.

When you need a line of credit

  • You are not sure how much money your business will need.
  • Your business needs money over a period of years.
  • You have a good credit score.

Bottom line

When you are sure of the amount of money your business may need, it is best to go for a small business loan. Due to variable interest rates associated with a line of credit, you may end up paying more than necessary. In case you are not sure about the loan amount and need to withdraw over a period of time, first make sure to have an estimate on the total amount you may need and consider your credit’s condition.

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