Business financing is a great way to boost your business to achieve your business goals. As a business, you'll have various financing options such as crowdfunding, SBA loans, term loan, line of credit, etc. Due to these many choices, you can get overwhelmed when deciding which financing option will be best for your business.
However, if you're a small business, your best options will be a business line of credit or a business loan. Both have their lists of advantages and provide your company with cash flow.
Nevertheless, their role and structure make the difference in driving your business growth.
Confused over which one to choose or which is the best for your business? Well, your choice may vary as there is no clear answer. However, it will be easier to choose the best option when you know your business needs and the differences and similarities between a business line of credit and a loan. You must be aware of the following.
What Is The Business Line Of Credit?
A business line of credit works somewhat like a credit card. One can borrow money up to a predetermined limit in this financial option. You must only pay the interest on the amount you used or borrowed. Whether you prefer paying the total amount monthly or the minimum, the choice is up to you.
Still, like in the credit card, the balance that is left with you, you have to pay interest for that amount only. When you return the amount, you can borrow those funds again, depending on your credit limit, and you don't even have to get it re-approved or reapply for the application.
What Is A Business Loan?
Business loans are also known as term loans; they are given to small business owners that they have to pay back over time, with interest. These loans are for those who want to invest in a long-term business, such as remodeling or purchasing a building. They are generally larger and must be repaid within a year or two.
Merits And Demerits Of A Business Line Of Credit And Business Loan
A business line of credit and business loan has several advantages and disadvantages. Before you apply for a loan, make sure to look into these merits and demerits.
Merits Of A Business Line Of Credit
In the application, you don't have to disclose the purpose of using the funds; borrowers can use the funds for any purpose.
Business owners can access the funds based on their cash flow needs.
Borrowers just have to pay on a particular portion used on the line of credit.
Demerits Of A Business Line Of Credit
Interest is higher than business loans and may increase to 99%.
The application process is time-consuming.
You can overspend because of the line of credit.
As compared to the business loan, the limit of borrowing is less.
Merits Of A Business Loan
In the application, you must specify the purpose of using the funds, though you can use funds for any purpose.
Compared to business lines of credit, the interest rates are usually on the lower side.
You can set your budget easily by paying monthly, and the rates are fixed.
According to the terms, you can repay the loan over 25 years, and it may occasionally be extended based on the circumstances, which would result in lower payments.
Demerits Of A Business Loan
They may require you to submit things as proof, such as equipment or property; this will help you to secure the loan.
Inflexible schedules for repaying the loan and any missed or late payments can cause you to pay additional fees.
It is necessary to provide a person's guarantee.
Business Line Of Credit Vs. Loan: What's The Difference
There are benefits to both business lines of credit and business loans. As long as the lender informs the credit bureaus of your payments, both contribute to the growth of your business and business credit score.
You can see the following differences in the business line of credit and business loan.
Features | Business Line Of Credit | Business Loan |
Flexible financing period | x | ✓ |
Monthly fixed payments | ✓ | x |
According to the requirements, you can replenish the credit line | x | ✓ |
Increases business credit | ✓ | ✓ |
Maximum funding amounts | ✓ | x |
Business Line Of Credit Vs. Loan: Which One Is Best For You
Lastly, you may want to know, out of a loan and a business line of credit, which will be best for your business? Well, check the following points that may help you decide.
The amount needed: Business loans generally offer higher funding than lines of credit. A business loan is better than a business line of credit if you want to purchase something major like real estate or equipment.
Time period: Often, loans include large amounts, and you can repay this loan over a 25-year period, and the years can be extended. On the other hand, with a business line of credit, you have to repay the loan in a year or two.
Both business lines of credit and loans serve the purpose of your financial needs. Depending on your business demands, you may want to go for a business loan or a business line of credit.
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