Business Loan And Business Line Of Credit: Which Best Suites Your Business?
What Is a Business Loan?
A business loan is a lump sum of cash you get from a business financier and then repay with interest over an agreed period and terms. The funds can be used to finance a business acquisition and investment and acquire specific projects to boost your business growth. You then repay with interest over the agreed time.
The funds can be used to finance a business acquisition and investment and acquire specific projects to boost your business growth.
You can qualify for various business loans depending on your business qualifications, financials, and needs. Other short-term business loans have quick repayment plans, usually from 6 to 24 months. But there’re other business loans with longer repayment terms that take several years.
A lender may ask you to put up collateral or not based on your business qualifications.
Traditional lenders like banks may ask how you’ll spend the funds, so you must prepare a comprehensive business plan before applying. However, alternative private lenders usually have less requirements to get approved.
Like all the other financing options, business loans have benefits and drawbacks.
Here are some of the pros that make a business loan ideal for your business than lines of credit?
- Business loans have higher limits. Meaning you can borrow more funds than using a LOC
- You get the complete limit of the funds upfront.
- Typically, you’ll need to put up collateral to secure the loans. The collaterals may include your; cash savings, inventory, or real estate.
- Other business loans are bound to be used only on specific projects. For example, say you get an equipment loan, you can’t use the funds to pay your employees’ salaries on a low month.
Now let’s look at a business line of credit. Is it a better financing option for your business?
What Is a Line of Credit?
A business line of credit enables you to access flexible and fast working capital for your business. Lines of credit work similarly with credit cards. You can get any amount of money you need up to the available limit on your credit, then repay with time the interest for the amount you spent.
The most common business lines of credit are revolving. Meaning your credit limits are replenished when you pay back. This way, you can only apply once but draw the funds continuously up to your available limit without approval.
There are two types of business lines of credit. A secured line of credit is backed up by collateral. Also, you can acquire an unsecured business line of credit.
A line of credit can be useful for businesses that need continuous access to funds to sort out payrolls, unexpected charges, business emergencies, cash flow, and even grab new business opportunities.
However, to decide whether lines of credit are best for your business, consider their pros and cons.
The Pros for Lines of Credit
- Business lines of credit are not limited to any business expense.
- You can pre-qualify for a business line of credit without collateralizing your personal or business assets.
The Cons for Lines of Credit
Sometimes business lines of credit have lower loan limits than business loans which may be a problem for larger business entrepreneurs.
Breaking Down the Differences Between a Business Line of Credit Vs. Loan
Business loans and lines of credit give you access to funds and repay after a certain period. Both financing options are ideal for growing your business because they boost your working capital. However, they differ in many ways.
Understanding these differences will help you choose the best financing option for your business.
Below are the differences between the two.
A business loan has a fixed repayment schedule and defined term limits. Most loans require you to begin repaying immediately. A business line of credit is more flexible with irregular payment terms. And you only pay back the interest on the funds you used.
APR and Fees
Business lines feature higher rates than comparable business loans. However, these factors largely count on the lender you work with and your financials.
Business lines of credit have less and flexible requirements than business loan requirements based on lower funding limits. Note that the requirements differ with each lender. Therefore, it’s best to work with a Business Funding Advisor.
The amount of funds you can be approved for a line of credit and business loans vary. Typically, business loans have higher limits than lines of credit. Still, you can get approved for a line of credit with higher limits based on your qualifications.
Business lines of credit have incredibly wide financing options. You can use the funds for any of your business expenses or needs. In contrast, business loans allow you to access funds for a specific project.
With a business loan, you have to reapply for additional cash if the funds are not enough for your purpose. This includes the whole application process. However, a revolving business line of credit leverages you to continuously use the capital as you repay what you borrowed.
Business Line of Credit and Loan: Which Is Best for Your Business?
Deciding between a loan and a business line of credit can be simplified by considering a few main factors. Before choosing the ideal loan, you’ll need to consider the following:
- The purpose of the funds
- The amount you need
Business loans are more suitable for financing one-time specific projects. For instance, you can use the funds to expand your business, buying inventories or equipment.
If you prefer a predetermined schedule and monthly payments, business loans may be your best shot. Since the loans have a fixed payback amount, you can quickly and accurately budget your expenses before you start spending.
Additionally, if your business needs more finances or you want to fund a long-term project, a business loan may be the financing option.
Comparatively, if your business needs extra money for unanticipated needs like marketing, hiring, or paying for operational costs during lean months. A business line of credit may be the best option. Lines of credit can also be very helpful if your business comes across opportunities that are very time sensitive and need access to capital immediately.
A business line of credit can also help you in the long term because you draw the cash you need up to your limit, pay back, and get access to more money.
How Do You Choose the Right Financing Option?
Both business lines of credit and business loans seem ideal financing options for entrepreneurs in different situations. The choice still narrows down to your business goals and model.
Finding a perfect financing option can be a long and tedious process. However, with the help of an experienced business funding advisor, you can carefully go through the options, save time, and avoid all the loopholes involved.