If you’re looking to build or grow your business, you may be looking at opening a business line of credit or a business loan. Each product serves a unique purpose. Understanding the differences can help you make the best decision for you and your business.
Covering the Basics: What’s the Difference?
A business loan is a one-time loan that provides funding for a specific business need. They’re best used as longer-term loans—this could be anywhere from 2 to 6 years. While business loans tend to have higher interest rates than business lines of credit, they usually have fixed rates, giving you consistent monthly payments—a luxury any small business owner can appreciate.
A business line of credit is a loan that can be used more than once and for a variety of needs, such as payroll, receivables or marketing efforts. These loans tend to be shorter-term loans with lower interest rates. However, the rates tend be variable, so payment amounts can fluctuate.
Once you secure a business loan, you’ll usually begin making payments right away. For a business line of credit, it’s a little bit different. Let’s say you’re approved for a $100,000 line of credit, but you’ll only need to use about $10,000 for an upcoming expense. All you have to do is take out the money you need. When it comes to paying it back, you only pay back the amount you took out—so, the $10,000 plus interest.
You’re done making payments as soon as you pay down the debt and until the next time you decide to take out money. The cool part about a line of credit? You can continue to do this at your leisure as long as you responsibly manage your payments and you don’t exceed your credit limit.
Where to Draw the Line
Business loans are your best bet if you’re looking for a fixed interest rate, consistent monthly payments and a longer-term loan.
A line of credit is a great resource if you’re looking to have access to cash fast. Expecting an upcoming seasonal rush? Plan ahead by using a line of credit to stock up on extra inventory, which could allow you to be more successful. Or, maybe you’re having temporary cash flow slowdowns, in which case a line of credit could help cover expenses like paying your employees.
Make sure you’re monitoring how often you access your credit line. Remember, rates for these tend to be variable. In an increasing rate environment, they could change quickly. Also remember to borrow responsibly. Just because you have access to $100,000 doesn’t mean you should use all of it. A line of credit can be easy to misuse, so make sure you fully understand the requirements and limits before you begin borrowing.
Explore Business Funding Options
Talk with a financial institution like Navy Federal Credit Union about the loan options available to you. There are benefits to both—it’s all about discovering what’s right for you and your growing business.
- Determine what kind of funding challenges your business is facing. Do you need access to revolving cash to cover short-term funding gaps, like slow season? Or, do you need a large lump sum to cover expansion costs?
- Explore the business loan and business line of credit options available at Navy Federal. Reach out to speak to a representative if you have questions about which product might fit your situation better.
This content is intended to provide general information and shouldn't be considered legal, tax or financial advice. It's always a good idea to consult a tax or financial advisor for specific information on how certain laws apply to your situation and about your individual financial situation.