If you’re looking to start, build or grow your business, you may be looking at a business line of credit or a business loan. Each loan serves a unique purpose. Understanding the differences can help you make the best decision for you and your business.
Covering the basics
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 two to six years. While they 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 but the rates tend be variable, so payment amounts can fluctuate.
Keep in mind that a business line of credit is usually unsecured debt, meaning it won’t require any collateral such as assets or real estate.
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 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. The additional inventory 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 such as paying your employees
Make sure you’re monitoring how often you access your credit line. Remember – rates for these tend to be variable and in an increasing rate environment, meaning they could change quickly.
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.
Talk with your financial institution about the options available to you. There are benefits to both – it’s all about what’s right for you and your growing business.