Small Business Loans vs. Line of Credit — What’s the Difference?

small business loans vs. line of credit

Anyone who has owned a small business for an appreciable length of time has encountered the need for some extra cash at least once.

And, of course, if you’ve decided to start looking into small business financing, you’ve probably encountered a ton of different terms, many of which you may have never seen before. Two of these most common forms of business funding are small business loans and business lines of credit, typically referred to as simply lines of credit.

Sure, they’re both ways to get your business some extra cash when it needs it the most, but which is right for you? Are there any differences between the two, and which one can be most helpful for you? Let’s break it down and shed some light on the subject:

Business Line of Credit

A business line of credit, at its core, isn’t too different from a personal line of credit such as the credit cards you carry and use every day. You have access to a set amount of financing and you don’t incur any interest or have to make any payments until you use the funds for whatever you need.

Different types of business credit lines exist, many of them with slightly different stipulations as to how and when they can be used. “Revolving” lines of credit, for example, allow you to borrow as much as you need against the line of credit and pay it back. These credit lines are generally used for much more long-term financing needs and can be offered for a period of up to 15 years in some cases.

Small Business Loans

Small business loans, on the other hand, tend to be more direct and short-term. Generally secured in a fixed amount, business loans give your business a set amount of cash all up front for a specified purpose such as financing business expansion or replacing needed business inventory.

As the entire amount is provided upon receipt of the loan, the repayment plans tend to work differently than with lines of credit, and can vary depending on the amount loaned and how the loan was used. Generally speaking, business loans require some kind of plan or documentation showing how the loan will be used, or at least a description of the business need that the loan is fulfilling.

Business Loans vs. Lines of Credit — Which Should I Pick?

As with any need for small business financing, the sort of funding you pick should be the one that best meets the need of your business and the specific funding need you’re trying to fulfill. In many cases, small business loans offer more advantages such as flexible repayment plans and variable funding sizes, so for a short-term business loan or for a business that would be better off with lower payments, something like working capital would fit the needs of your business better. It’s important to weigh your options and to decide what’s best for the health of your business in the long term before settling on a form of business financing.

If you need access to small business loans and want to learn more about what they can do for you, apply for small business loans with Credibly today and see what we can do for the health and future of your business.