What are the Key Differences Between a Business Loan and a Line of Credit
For people that want to get same-day business funding for their company, they need to understand what they are applying for. Many owners don’t recognize the differences in the types of funding they can attain. Two of the primary ways small businesses attain monetary needs are through business loans and lines of credit. There are some key differences between these two outlets.
Business loans are a one-time transaction where a sum of money is given from lender to applicant. The sum of money is completely transferred to the business and must be repaid as the terms of the agreement outline. Due to this, monthly payments for a loan are uniform from month to month.
Loans have an interest rate associated with them. It will rarely fluctuate from the initial agreement of the loan. The best small business loans will have low interest rates. Same-day small business loans have some of the best interest options available.
Loans always have a set length of time in which to pay them back. These periods are directly related to the amount of the loan. They can be from 1-year to over 10-years.
There are several factors that determine the amount of your loan, but typically loans can range between $5,000 to over $100,000. A same-day business loan can often merit these amounts.
Lenders can be any number of entities: Banks, government, crowdfunding, and online sources for fast business loans. Each provides different pros and cons. Certain lenders will be better for one small business over others. Research and choose wisely.
Loans are more structured than lines of credit. With specific terms, beginning and end dates, as well as amounts, loans are clearly outlined. Proper planning and execution allows business owners to utilize loans to improve operations from a well developed framework.
Business Line of Credit
Similar to personal credit cards or home equity credit, a business line of credit gives the organization access to a set amount of funds. It is sometimes called an operating line of credit. Like a credit card, you don’t accrue interest until you’ve purchased anything with the line of credit. Lines of credit are often acquired before the owner actually needs the money.
The purpose of a business line of credit is to have a constant access to a set amount of funds without necessarily needing to withdraw from it.
A line of credit has interest. Generally, it varies depending on the company and amount of credit given. It is commonly less than it would be for a loan, but the variables can spike drastically. Late payments and overdrawing can turn a sensible interest rate into a nightmare interest rate.
A line of credit does not expire. When you open a line of credit, as long as you continue to use it, it will remain open indefinitely. Age of credit can have a positive impact on your credit score.
For lines of credit, these tend to be lower in value. Because of the ability to dip back in the well, lines of credit don’t need to be valued as high as loans. Every time you are able to pay your balance and bring it to zero, you have the full amount of your credit line available to use.
Banks are the primary source for lines of credit. However, there are some companies that will open lines of credit to business that have constant transactions with them.
The primary distinction for a line of credit is its flexibility. Credit lines allow you use any portion of your credit limit. This can lead to overspending easily. Use caution when relying on lines of credit to pay for necessities.
Ultimately, both are good for small businesses, but it is imperative to use each for specific reasons. Loans are structured and designed to implement a business plan through outside funding. Lines of credit should be used to improve credit score, to help attain a loan, or in emergency situations. Develop a business plan to assess which type of funding is right for your company. Once you have plan, enact that plan to acquire the resources you need to help your company prosper.