There are many types of small business loans. Two business financing options available are lines of credit and small business loans. Each has unique advantages and uses in the context of funding a business.
Business Line of Credit:
A line of credit has more in common with a credit card than a traditional business loan. Instead of applying for a loan and getting a set amount of money with a set repayment schedule, a line of credit is a well that you can draw from at any time.
You get approved for a set amount of money that you can deposit into your businesses’ checking account whenever you need it. Until you take money out of a line of credit you do not make any payments, even as funds are available to you. Once you withdraw money from the credit line, you make monthly payments to repay it with interest, at rates higher than an SBA loan. Unlike a small business loan, a line of credit is reusable. Once you pay it back, you can dip into it over and over again.
Also unlike a loan, a line of credit is not tied to a specific business function, such as purchasing equipment or real estate. Lines of credit are available to most small businesses, and are generally smaller than SBA loans, ranging from $1,000 to $500,000, depending on your company’s financials.
To see if a business line of credit is right for you, read this article: 10 Reasons Small Business Owners Should Take Out a Line of Credit.
Small Business Loans:
Small business loans are long-term, low-interest loans for small businesses. The U.S. Small Business Administration establishes guidelines for SBA loans and makes them available to businesses that cannot secure comparable financing. Unlike a line of credit, SBA loans come with partial guarantees to the lender from the U.S. Small Business Administration in the event that the borrower cannot repay the loan.
Small business loans can serve a variety of purposes from startup funds to construction loans to equipment loans, but they always have a specific funding goal. They are not reusable, as lines of credit are, instead serving as a one-time source of capital to meet a certain company objective.
SBA Loans can come with fixed or variable rates, usually the prime+ interest rates reserved for banks’ preferred customers. SBA loans can be much larger than lines of credit, ranging from $35,000 to $5,000,000.
The below table compares some key features of lines of credit and small business loans:
|Function||Line of Credit||Small Business Loans|
|Can be used for||Any business need||Tied to a specific need|
|Reusable||Can be used over and over||One-time loan|
|Duration||1-20 Years||25 Years|
|Payment Frequency||Monthly, until withdrawn funds are replenished||Monthly|
|Available to||Most small businesses||Small businesses that cannot get reasonable financing elsewhere|
A business line of credit should be treated similarly to a credit card – used whenever needed for operational expenses and paid back as soon as possible. Small business loans are one-time infusions of capital to fund a specific business growth objective that you pay back over a long period of time.