Small business owners may need funds for several reasons. Fortunately, there are several financing options available today that can help businesses secure funds on time. The two most common options are business lines of credit and loans. One other option for small businesses is a down payment, but for the between a loan and a down payment, you should look elsewhere.
In short, a business line of credit is the best option when you have short-term and occasional credit needs. Small business loans, on the other hand, are best for meeting long-term credit needs. Let’s outline the difference between a credit limit and a loan to see the difference and help you meet your credit needs.
Difference From Business Line Of Credit With Loans
The business line of credit is very similar to a personal line of credit such as a credit card. It is often used by businesses to meet large and unexpected variable costs.
Business lines of credit can be guaranteed or unsecured and are often referred to as “spins,” meaning borrowers can take advantage of them again and again. For example, if you have a $25,000 credit limit and take $15,000, you’ll still have access to the remaining $10,000. If you pay back $15,000, you will go back to $0 and have access to the entire amount without having to reapply.
To better understand this, the following are scenarios that would make sense for you to choose a line of credit.
Imagine you get a big home furnishing contract that has to be completed within a month. To get the job done, you need to hire some part-time employees, but you lack the funds to pay them. In a scenario like this awhen you need immediate funds to meet short-term demand, it would make sense to go down the line of credit.
Small business loans allow you to borrow large sums of money for business purposes. The amount is paid to you at once and you are required to return it within a certain period. The term of the loan can range from one year to 20 years.
You can choose a term loan with a different repayment period and with a fixed or variable interest rate. Traditional lenders such as banks offer business loans for about 5 percent to 12 percent interest. Lenders or online marketplaces tend to charge higher interest rates.
Here’s an example to understand this. Your small craft business is quite successful in your city. Driven by the numbers, you decide to expand your business and set up shop in another city. You need funds to rent space for three years, which will make term loans the most recommended option.
Business Line Of Credit And Loans, What’s the Difference Between The Two?
So what’s the difference between them? As we mentioned before, that usually the business line of credit is used to meet short-term needs. While for loans are used to meet long-term needs. But to be clear here’s the difference between the two.
For business loans, the interest rate is very likely for a fixed rate. You are required to make an interest payment on the entire loan amount. If you choose a line of credit, the interest rate will most likely be variable. You must pay interest only on the amount you borrow on a credit card or line of credit. It’s also worth noting that lines of credit generally have lower interest rates compared to business loans.
However, there is a difference in terms of payment. With business loans, monthly payments don’t change if you use all the money. If you choose a line of credit, you will need to make payments only with the amount of money you borrowed. In other words, if your balance is zero, your payout is also zero.
Another difference between the two has to do with cost. You will have to pay loan processing fees and appraisals to cover your business loan. If you choose a line of credit, you will have to pay the initial processing fees and fees associated with each sweepstake you generate. To give an example, a bank might charge a $50 transaction fee each time you make a draw from your business line of credit.
Well, that’s information about the business line of credit and what’s different from loans. For those of you who have a small business, of course, it is very important in understanding the differences between the two and knowing which one is best.