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Posted by Ashley Olivia - 13 December, 2018

How Do Lines of Credit & Small Business Loans Differ?

Owning a small business asks for constant growth and development if you want to keep up with big companies.

The decision of whether to take out a loan or a line of credit can be difficult since both offer great benefits.

Nevertheless, before deciding upon which to take, you should first know the differences between line of credit and small business loans to figure out which will work best for you.

A business loan is one of the methods people are most familiar with. It works in similar ways as a personal loan people take out to buy a house or a car.

After you have submitted your request for a business loan, you wait for the approval. The bank approves and you sign a contract under set terms and you get all of the money right away.

You pay the loan back in fixed, regular monthly payments with interest rates.

These are usually used for larger assets that will continue to provide value for the borrower after the loan has been paid off.

A line of credit most resembles getting a new credit card. A business owner makes an agreement with the bank on how much credit they can take out without it requiring any collateral or assessment of credit score.

Once the business owner is allowed access to the money, he can take out as much as he needs, whenever he needs it, as long as the combined amount does not exceed the first set amount given to the user.

DSO average customer payemtn

It is paid off in variable monthly amounts – it all depends on how much of the amount the user has taken out. If they have not taken out any money, then the payment is zero.

A line of credit is usually something that is used for emergencies if the company's cash flow is suddenly smaller than usual etc.

Here are the main differences between business loans and lines of credit.


Interest rates

Naturally, the interest rates between the two are different. When it comes to business loans, the interest rates are fixed.

With the business line of credit, the interest rates may vary on a monthly basis. Keep in mind that if you miss a payment on the line of credit, the interest rates will grow.

If you manage your line of credit in a smart way, your interest rates can actually be lower.

Barry Wells, an entrepreneur at Origin Writings explains, “What really worked for us is the business loan. Our company needed large assets to start with and a business loan fits into our story perfectly. Interest rates are not that hard to pay off if you know where your money went and you are making money on what you bought.”

Payment

When you take out a business loan, you are likely going to get a set payment schedule. Line of credit does not have a set number of payments – you pay when you use the money given to you.

“Our company used a business line of credit and we enjoyed the fact that the money was always available to us if we needed it but if we didn't, our monthly payments were small or not required at all. This way we had funds for when an unexpected cash flow decreasing happens.” says Jake Green, a Business writer at Write My X and 1 Day 2 Write.

When you get the money

Line of credit gives you rights to draw money when and as you need it.

With a business loan, you will get the entire amount at once, when you sign all of the papers.

If you believe that you will need a constant access to funds, then line of credit is a better fit. However, if you need all of the money at once, business loan offers larger amounts given after you have signed the contract.

What they are used for

Business loans are meant to be used for a specific purpose, like purchasing a building or an office space.

Line of credit is something you tap into for smaller purchases or emergencies.

What you need to think about first when you decide that you need a loan or a line of credit is what you need the money for. If you need the money for a large asset that would require many funds, then what you should get is a business loan. Otherwise, for smaller assets or emergencies, what will fit you best is a line of credit.

Summary


Depending on what you need, both the business loan and the business line of credit can be useful and beneficial to your business.

With these differences in mind, think about what would suit your company best – gather information at all of your local banks and see what offers you most value.

What are the main differences between a small business loan and a line of credit?

  1. Interest rates

  2. Payment

  3. When you get the money

  4. What they are used for

Control your company's cash flow

Author bio: Joel Syder is a business analyst and writer at AcademicBrits. He enjoys helping people to realize their potential in exciting field of information technology as well as creating articles about things that excite him.

Topics: Management, Finance

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