3 Ways a Business Line of Credit Differs From a Business Loan

By Robert Whited Business Financing 101 Restaurant Financing Small Business Financing May 1, 2015

Many small businesses, like restaurants and retail stores, will eventually need financing to achieve maximum growth in the market. Obtaining working capital allows a small business owner to buy new equipment, open new locations, conduct renovations and more.

Two of the most popular ways that small business owners expand their companies is by obtaining a business line of credit or business loan.

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If you’re currently looking to finance the growth of your small business, you may be wondering what the differences between a loan and line of credit are. This post will run through the differences to help you determine which financing option is right for you.

1. Payment Flexibility Options

When you take out a loan you usually start making payments right away. Similar to many of your other recurring bills, your loan payment will be for the same amount and due on the same day, regardless of how much of the loan you’ve actually spent.

Unlike a business loan, your line of credit payments will be based on how much of the money you used that month. This means your monthly payments may go up or down based on how much financing you used that month. This requires some foresight and planning on your part to be sure you’ll be able to make your payments on time.

2. Closing Costs

When you are approved for a line of credit the closing fee you pay will likely be nominal (if you are even asked to pay for one at all). However, most business loans carry a closing cost between 2-7% of the total loan amount.

If you are not prepared to pay that loan closing fee, a line of credit may be a better option for you depending on how much financing you need.

3. Interest Rates and Payment Terms

Business loans have fixed interest rates while credit lines have lower, variable rates. However, it’s important to keep in mind while the interest rates are lower, they can increase if you exceed your credit limit or make a late payment.

On the flip side, proper management of your line of credit can get your interest rates lowered.

If you’re still unsure about whether you should take out a business loan or line of credit, contact one of our business consultants today to talk through the options. We can answer any questions you still have.