Did you know that there are over 32 million small businesses in America? Most rely heavily on a business loan or line of credit for funding.
Have you considered starting a small business but don’t know the best way to secure funding? It’s important to understand the difference between a business loan vs. line of credit.
The following guide will explain how each type of funding works to help small businesses get off the ground. Read on and learn if a loan or line of credit is right for you.
What Is a Business Loan?
Business loans offer a lump sum of money that gets paid back with interest over time. There are different types available for different situations when getting a business loan.
Long-term loans function to help finance long-term investments. Examples include purchasing or remodeling a property. They are usually for bigger amounts of money and get paid back over three years or more.
Short-term business loans help small business owners with instant capital requirements. Examples include purchasing inventory or paying workers and rent during slow seasons. These loans usually have a 6-month to 24-month term.
Business loans are commonly offered through commercial banks, community banks, and online lenders. Approved SBA-guaranteed loans range from $500 to $5.5 million depending on the specific program.
SBA loans and bank loan amounts depend on personal and business credit scores. They require a business plan, bank statements, and other financial statements. Sometimes lenders request collateral like machinery or your home.
What Is a Line of Credit?
A line of credit lets you borrow a set limit similar to a credit card. You only have to pay interest on the amount of money you borrow. You can either pay the full amount each month or make a minimum payment.
Remember, any balance you leave each month accrues interest. You can keep borrowing funds up to your credit limit as you make monthly payments.
Lines of credit work best for short-term funding needs like paying seasonal employees. They also work well as an emergency fund even if you don’t need the funds immediately.
You can get lines of credit from banks, online lenders, and through the SBA’s CAPLines program. Amounts are smaller than loans, and $250,000 is usually the limit.
Business Loan vs. Line of Credit
You need to examine several factors when deciding between using a business loan or a line of credit.
First, determine exactly how much money you need to borrow and when you need it. Consider a business loan if you need an amount over $250,000.
Identify what you need the money for and find a loan for that specific purpose. However, a line of credit is better if you’d prefer money without use restrictions.
Business loans are more predictable because of set monthly payments and fixed interest rates. This might make it easier for you to stick to a budget.
Lines of credit offer more flexibility because you can adjust your monthly payment. Just remember that they’re more likely to have changing interest rates if you miss a payment.
If you have a lower credit score it might be difficult to obtain large loans. Paying off a line of credit is a good way to build your score for future loan approvals.
Which Will You Choose?
Now you know the key differences between a business loan vs. line of credit. Remember, consider the amount of money you need, your credit score, and when you need the funds.
Check out our finance and business sections for more helpful tips and information.