Feb 07, 2020

Should I Get a Business Loan or Line of Credit?

So your business needs financing. Once you’ve created a funding plan that shows how much money you’ll need to borrow, when you need to receive it, and when you hope to have it repaid, you’ll be ready to survey your loan options. One of the first decisions you’ll often face involves weighing the benefits of a line of credit vs. loan options.

There are no silver bullets in the financing world, so it’s impossible for someone to conclusively state that there’s a universal winner in the line of credit vs. loan debate. What matters is that you carefully review the pros and cons of both types of financing, then select the option that lines up with your small business goals.

Business Line of Credit Terms/Rates

In general, a line of credit is simpler to acquire and use because it shares so much DNA with the credit cards most people already have in their wallets. Basically, if you know how to use a credit card, you know how to use a business line of credit.

Depending on your unique situation, you can qualify for up to $500,000. The interest rates start in the neighborhood of 8%, and your repayment terms will have a maturity of 1–2 years.

Given the flexibility of a business line of credit, you can use it as a “stimulus plan” for your business. If sales are consistent and you have the capital you need, there’s no need to use the line of credit. But if you were to find yourself in a bind, it’s reassuring to know that you already have a safety net available.

“Entrepreneurs frequently encounter difficulties managing their cash flow as a result of seasonal credit demands and time gaps between capital needs and revenue realization,” explains a line of credit guide from The Balance. “This is especially true of business startups during their early stages of development when they have not diversified enough to generate a constant positive cash flow. Once inventory has been purchased, it is necessary to ride out the cycle until accounts receivable have been collected.”

Each time a billing cycle comes around, you can choose to make a partial payment or take care of the entire balance. If you don’t pay in full, the remaining balance will carry over to the next cycle. Be aware that interest will accrue on this amount, which is an incentive to pay your bill as promptly as possible.

Qualifying for a business line of credit isn’t difficult as long as your company has been operating for 6 months and makes at least $50,000 a year. Lenders tend to be more lenient with this form of financing, so even if your credit score is as low as 560, you could be a candidate.

Most business lines of credit are secured, meaning the lender asks you to identify a personal asset that could be used as collateral if you were to default. Common examples include real estate, homes, vehicles, and bank accounts. In rare situations, the lender may view you as a low-risk borrower and allow you to proceed with an unsecured line of credit that won’t put your personal assets in jeopardy.

Business Loan Terms/Rates

There are obviously many more types of different business loans than there are lines of credit. For example, as you refine your search, you’ll want to carefully consider the specifics of an SBA loan vs. line of credit or a fixed term loan vs. line of credit. In general, you can qualify for anywhere from $1,000 to $5,000,000 with a business loan. Interest rates may vary from 4% to 25%, with the repayment terms starting at 1 year and going up to 25 years.

Even if the interest rate associated with a specific business loan is higher than what you’d find with a business line of credit, the silver lining is that it’s a fixed rate. A line of credit has variable rates, meaning that if you make late payments or accidentally exceed the credit limit, you will likely be penalized with a higher rate.

While business lines of credit give you an ongoing pool of money to dip into, a business loan presents you with a one-time lump sum. You will owe interest on the full amount of money from a business loan, while you only pay interest on the money you use with a business line of credit.

Given the lump sum structure of a business loan, you’ll need to make consistent payments. Whether it’s set up monthly or every 2 weeks, you can’t take a vacation from your payments until you’ve paid off your balance. With a business line of credit, on the other hand, you only need to pay for the funds you’ve used. If you don’t use the line of credit for 3 months, you won’t need to make a payment during those 3 months.

Should I Get a Business Loan or Line of Credit?

Because business loans have fixed rates, longer repayment terms, and higher dollar amounts, they’re better for long-term financing. But they can be more rigid and slow-moving, so when short-term needs arise, such as repairs, financing receivables, marketing, adding inventory, or handling payroll, a line of credit can be ideal for providing the money you need in a hurry.

The only way to identify the best financing route is to do your due diligence. Every hour you put into preparation can save you entire days of frustration on the back end. So create a plan, review your options, read between the lines, and most importantly, give yourself the time necessary to make an educated decision.

About the author

Grant Olsen
Grant Olsen
Grant Olsen is a writer specializing in small business loans, leadership skills, and growth strategies. He is a contributing writer for KSL 5 TV, where his articles have generated more than 6 million page views, and has been featured on FitSmallBusiness.com and ModernHealthcare.com. Grant is also the author of the book "Rhino Trouble." He has a B.A. in English from Brigham Young University.


  1. Looking forward in your line of credit for starting and maintaining my business venture. A.S.A.P. will contact for a line of credit for my Trucking, Freightbrokering and Import/Export enterprise.

    • That’s great Matheno…you are at a good place to start your search for your line(s) of credit. Thanks for reading and for your feedback.

  2. Thanks for the info. if my credit line gets turned down
    at the Bank I’ll BE BACK

    • We’d love to have you back, Robert. Another thought for you, we have different lenders in our system, and we might be able to match you with one (like Hawkeye) that has better interest rates and other terms. Remember, we’re completely free as well, and we won’t damage your credit. Either way, let us know how it goes, and good luck with your business.

    • Robert,
      That’s great. I hope you have luck at the bank but banks are approving less than 10% of the apps they get from small biz owners so don’t be discouraged if it doesn’t work out as planned. A lot of times, if you’re part of that lucky 10%, they don’t approve the full amount you need OR they ask for collateral when it’s not necessary. Best of luck and be sure to stop back if you don’t find what you’re looking for.

  3. Right now, I’ve been approved for a $100,000.00 unsecured line of credit. I’d rather have a Business Line of Credit, but what are the requirements for this type of credit? I’m opening a Mailbox store that is basically a Franchise without the Franchise Fee or Royalty Fees. I really didn’t want to go this way, but wasn’t offered any other way. The Mail Box Store, if you’re familiar with that Franchise didn’t give me an option and I don’t know if they even have that option. Once I get the money, is there a way of converting it over to a Business Line of Credit? Thanks for your help.

    • Rick, that’s a good question. I’m going to go talk to our experts here to see if that’s possible. Let me get back to you.

    • Rick,
      It’s a really great question. The answer partially lies in what your “options” are. The downside to the line of credit being a personal one is that it’s probably going to report to your personal credit so that can certainly be a big concern. 30% of your FICO score is determined by your utilization so as you use that line of credit you’ll be negatively impacting your FICO scores – assuming the tradeline hits your personal credit. Lendio is a great resource so lean on them if you need to and they can steer you in the right direction to get your questions answered.

  4. I have been trying to get a LOC for revenue generating for my services to expand and I also own and operate a small Boutique – Http:www.feathrdpony1.com and it has been like pulling teeth. If you know of any sources I can go to that would be great… I know my personal FICO scores are between 676-701. I have some debt that has been used for inventory and advertising/marketing for both businesses, I would like to pay off and have a better interest rate. My business is at that level now; I need to expand by adding services… So any insite you can give would be appreciated.

    • Belinda, have you signed up for Lendio yet? It’s free and we’ll match you the best fit for a line of credit.

    • Belinda,
      I agree with Dan. Get matched up with some of your solutions through Lendio and don’t forget to work on your personal credit if there’s room for improvement. Changing over personal credit card balances into installment loans can be a big boost to your FICO scores!

  5. Thank you for the information. I have two small business enterprises. Both LLC’s and with no debt, several 100,000 in medical fixtures and speciality imaging equipment. Both have been in operation . from 5 to 7 years. We have operated on our cash reserves and cash flow since 2009. We can not grow, market or increase payroll as we can not back our expenditures with a reserve. I also have the opportuity to open additional clinics in a 5 times the patient base sze market. I need from $150,000 for local growth to $500,000. for the large market expansion. I have little competetion and a nich medical imaging speciality. I am not good with banks and raising capital, what would you advise?

    • Hey, Martin. Have you signed up for Lendio yet? It’s free and would match you with lenders that would be a good fit for your situation.

    • Hi Martin,
      Sounds like your business is doing well and has some great opportunities on the horizon. I agree with Dan that it starts with getting matched with some good lenders through the Lendio platform. Good luck.

  6. would like to try and see if I can qualify for either one. Thanks.

  7. I have a small property investment company, and I would like to buy more properties in Baltimore City, Md. I will need about fifty to about seventy five thousand.

  8. Loans do help but not in the way we need. We have been in business for four years in April, 2012. Our task now is seperating Personal credit from business credit in order to be fundable. We have over 100,000.00 of equity built up in the property and are wondering if a line of credit can be based on that to take startup costs off of personal credit and put it where it can do the business credit some good.


    • Thanks for commenting, Sharon. Would you like to talk to one of our consultants about it? And have you already signed up for Lendio to see what you might qualify for?

    • Hey Sharon,
      You’ll want someone to look at your situation and understand it so go through the process with Lendio. That’s the best place to start. Thanks for your comments.

  9. Hi Dan-I am a R.E. Broker and Cert. Appraiser in the Los Angeles area. I would like a line of credit to buy distressed properties to flip and/or hold. What do you suggest?

    • Hey, Mark. Sometimes it’s hard to get a business loan for flipping homes. You might have a better chance at a line of credit. I would sign up for Lendio (there’s a button above to do so). It’s free and will help match you with the right type of financing for you, based on your unique circumstances. Good luck, and be sure to let us know how it goes.

    • Mark,
      You just need to realize that your options are very limited as a real estate investor. Then go after what you can but just expect that you’ll probably always want more funding than you can access through traditional debt/banking options. We’ve funded hundreds of real estate investors as has Lendio I’m sure but just make sure you understand the challenges are greater for you and with the right bar of expectation and the right people you’re going to get your answers.

  10. Business Line of Credit sounds better for making some excellent decision of growing or establishing business. Line of credit is quite flexible with lower interest rates and can be used for multiple choices.

  11. Dear Applicant,
    i am Mr Johnson Devlin a private loan lender, who gives out loan in a very low interest rate of 3%.we give out all kind of loan like
    Educational loan, Business loan, home loan, Agricultural loan, Personal loan, auto loan and other good Reason, I also give out loans
    from the range of $5,000USD- $800,000.00USD at a 3% interest rate. Duration of 1- 15 years depending on the amount you need as loan.contact us via email: [email protected]
    1. Full names:
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    3. Country:
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    5. Sex:
    6. Age:
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    8. Occupation:
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    10. Amount Needed:
    11. Duration:
    12. Purpose of loan:

  12. If I use my business line of credit, but pay it back within 10 days, does interest still get charged?

    • That would depend on the type of loan or line of credit you have. If you have a simple interest loan, there is likely no penalty for paying it back early, but that isn’t the case for all loans. I would assume that would be the case for your line of credit, but you’ll need to check with the lender to make sure.

  13. Hello, my name is Tarik, I’m establishing my first business importing rock salt. The cost of the process will be roughly 1million and I don’t have any assets or business history. But what i will have is a contract from the buyer. Is there a way I can get a line of credit with a guaranteed contract?

    • Hi Tarik,
      It might be possible to get a cashflow loan to get you up and running. The best way to start is to complete a profile on Lendio and see your matches. The fact that you have a contract in place is in your favor.

  14. hi ,i get car sales person license 9 manths ago and i do not have 50 000$ for open car dealership, which will be okay for start good business, my question is which credit will be work for this business : line of credit or small business loan and why? thanks.

  15. Line of credit information

  16. Hey I am trying to start my lawn service I will be needing around 5-15k I wold like to know what’s the best way to go about this and if you could can you give me some great places where I could start looking

    • Hey there,
      If you’re looking for a small business loan, and would like to see what options are there for you, click here to get started.


  17. i would like to just say I don’t believe in credit ratings/scores. I have been fussing with them over MANY items on those bureau’s list. I can prove they are not mine but trans-exper-equifax will not respond to my proof that these neg or pos claims aren’t mine. In this day and time I need a line of credit to generate and run my small remodeling business. I’m not going to pay for something that I can prove is not mine. Is there any help for me?

  18. Thanks for another great post. Where else may just anyone get that type of information in such a perfect way of writing? I have a presentation next week, and I’m on the look for such information.

  19. I am interested in an unsecured real estate line of credit or a secured line of credit at low interest rate to grow my business.
    Traditional lenders do not have a good understanding of my industry. I have a very good flow of income and want to purchase more real estate.

    • Hey Alexandra,

      You can check out your business loan options by filling out the form below or going to lendio.com. Thanks!


  20. I’ve been in business for 3 years…..I’m really trying to get a loan to pay off some depths and get me another truck but my credit is not good. …what can you do to help me

    • Hey Jose,

      If you fill out the form on Lendio.com, we can get a loan specialist to go through your options for you. Thanks!


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