Choosing between a business line of credit and a business loan can be challenging. Ultimately, the best financing option for your business depends on several factors. While lines of credit can address cash flow needs over time, loans offer a lump sum that can be used for major purchases, expansion and other significant expenses.
Consider the amount of money you need to borrow, the purpose of the loan and how quickly you need the funds before deciding between a business loan and a business line of credit.
What Is a Business Loan?
A business loan is a lump sum of money a business owner borrows and then pays back over time with interest. Loan amounts often extend up to $500,000, but amounts up to $5 million may be available from some lenders. Repayment terms can be short term or long term and may range from a few months to 25 years, depending on the lender.
Borrowers can use business loans for a variety of purposes, such as expanding their business, purchasing inventory or equipment, or covering operating expenses. However, many lenders require borrowers to indicate the loan purpose during the application process. Even so, the flexibility of small business loans makes them a good option for business owners who need to access a large amount of cash quickly and want to repay it in fixed installments over time.
How Do Business Lines of Credit Work?
As with term loans, business owners can apply for lines of credit through traditional and online lenders. Qualification criteria and the application process are often less rigorous than those required by traditional business loans.
Remember that if you’re approved, you’ll only be charged interest on the outstanding balance, not the entire credit limit. Borrowers can access funds repeatedly during the draw period—often up to five years. That said, APRs are often higher than those available for business loans and fall between 10% and 99%, depending on the borrower’s creditworthiness.
Pros and Cons of Business Loans and Lines of Credit
There are several benefits and disadvantages to consider when deciding whether a business loan or line of credit is right for your company. Familiarize yourself with the pros and cons of each before applying for financing.
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