When it comes to your business financing needs, there are numerous options available, including a small business loan and a business line of credit.
However, several key differences exist between the two financing options. Business managers or owners must be aware of these differences before deciding which one will work best to satisfy their business’s financial needs.
What Is a Small Business Loan?
In general terms, a small business loan is a certain amount of money given by a financial institution to expand, support, or start a business.
Compared to jumbo commercial loans, most small business loans are provided in smaller amounts to allow the company to have a higher chance of repaying the advance. You can utilize the loan funds in any part or aspect of your business.
What Is a Business Line of Credit?
Loans are a standard vehicle for individuals seeking capital for business. However, compared to a business loan, a business line of credit is considered more standard. If you have a credit card in your personal or company name, you have used a line of credit.
The revolving nature of a business line of credit makes it significantly different from a loan. A business line of credit may be replenished up to the credit limit repeatedly, while business financing typically involves a single, defined investment.
For businesses that require cash now and need quick access to more in the future, a line of credit is the right choice. As long as you pay down your balance, you will have continual access to credit.
What’s The Best Choice: A Small Business Loan or a Business Line of Credit?
Both business loans and lines of credit have negative and positive sides. Review the advantages and disadvantages of both to decide which option suits your needs.
Pros of a Small Business Loan
- Fixed interest rate
- Predictable loan payments
- Ability to finance significant expenses for a long time
Cons of a Small Business Loan
- Payments start right away, even if you have not used the loan money yet.
- Often has closing costs such as appraisal and underwriting fees.
- No flexibility once you have borrowed the money.
Pros of Business Line of Credit
- Potentially lower interest rates than a fixed-rate loan
- Reusable during the draw period, up to the amount of your credit limit,
- Borrow just what you need, as you need it
Cons of Business Line of Credit
- Potentially unpredictable payments make financial planning hard.
- Increased likelihood of penalty interest rate for late payment
- Shorter repayment terms
Whether you decide to use a traditional loan or line of credit, choosing the type of financing option will depend on your business goals.
Base your choice on your tolerance for loan fees, how long you need access to cash, and how much you will be paying each month of the loan term.