Small Business Loans Vs. Credit Line — What’s The Difference?
Acquiring loans for personal and business use are common in people’s lives. However, when you seek capital to start or grow your small business several options are available and opting for the right financing option is the key to success for your business. Including those several options are small business loan and line of credit, both of these financial tools are similar in being useful and beneficial for boosting your business.
Small Business Loan: Mostly people are familiar with this financing method. With a small business loan you borrow a fix amount of cash from a lender, you get the total amount at once, and then you pay it back in the form of monthly regular payments.
Credit Line: A line of credit is very much like a credit card. With a credit of line you can have an agreement with your bank that is willing to borrow you capital when you need it with a certain credit limit for the line. You have to repay the amount and interest will be charged only when you will start accessing the funds.
It is essential to know that you can utilize small business loan and credit of line to its best to satisfy your business financial needs only when you know and understand the key differences between them.
Here we have highlighted the major differences between small business loan and credit of line that will help business owners and managers to decide for the perfect type of loan for their company at the time they need capital.
Renewals: With small business loan once you have used up all the money you have borrowed, you have to reapply for a new loan. Unlike with a line of credit, it can be used multiple times, that is why it is also referred as “revolving”. Therefore you can use lines of credit as long as you desire to continue their use by fulfilling its minimum payment requirements.
Interest Rate: Usually business loans have high interest rates but they are tied with the same fixed rate for the life of the loan. Whereas lines of credit have lower interest rate but they are variable. This means that for instance: you are late in making your payments or exceed your borrowing credit limit then your interest rate will significantly increase over the published prime rate.
Payment Amount And Schedule: Business loans are structured on monthly payment basis with fixed amount. This simply means that as soon as you receive your loan, your monthly loan payment begins right away no matter you are using that borrowed money or not. Payments of money borrowed through a line of credit fluctuate from month to month. This means that these payments depend on the amount of money you have accessed hence, if you haven’t accessed to the funds, you don’t have to pay any payment, nor you will earn interest.
Long Term V/s Short Term: Ideally, small business loans are used for financing long term investments that take few years to pay off, such as taking loan for purchasing computer hardware or software, business assets, manufacturing equipment, structure improvement, etc. On the other hand, borrowing some cash through lines of credit is your best bet when acquiring it for short term financing expenses. For example you can access a line of credit to finance payroll, marketing campaign, unexpected overheads, or temporary shortage of cash liquidity.