The Difference Between a Line of Credit and a Loan
From unexpected investment opportunities to monthly expenses during a low season, there are numerous times when your business could use additional funds. Thankfully, there are many ways that a business can receive financing. Two popular options are lines of credit and a loan. Discover the difference between these two financing strategies, and discover which one is best for your unique business situation.
When you receive business lines of credit, your lender will approve you for a particular amount of financing. You then have the flexibility of taking out any amount up to your credit limit. Once you’ve taken out a part of your line of credit, your overall credit limit will be reduced.
This option is excellent for businesses who need a varying amount of financing over a few weeks, months or years. It allows you to take out exactly how much you need, when you need it. This makes lines of credit far more flexible than business loans, which can include a lengthy approval process. However, a line of credit may not offer the same payment plan and credit limit options of a traditional loan. You may have to pay higher interest rates and repay your loan in a shorter amount of time.
Bank loans, on the other hand, give you a specified amount of money upfront. This still allows you to flexibly spend your financing, but requires you to set the exact loan amount at the beginning. You’ll also begin paying interest on the full amount from the first day, rather than waiting to accrue interest until you need the money.
Unlike lines of credit, bank loans will usually offer fixed interest rates and consistent, predictable payments. This allows you to budget more accurately and understand the extent of your loan from the beginning. It’s a convenient way to understand the extent of the loan, as well as the amount of payments you’ll need to make in the future.
In the end, both a line of credit and a bank loan are used for slightly different purposes. If you need to balance the budget and pay monthly expenses as they arise, consider a line of credit. However, if you need a large amount of money for a single purchase and are looking for a consistent payment plan, choose a bank loan. Whichever option your business needs, you’ll be able to receive competitive financing to grow, stabilize or start your business.