How to Decide Between a Small Business Line of Credit and a Small Business Loan

Finding the right funding for your small business is never a simple task. To make matters even more complicated, there really isn’t a one-size-fits-all answer to funding issues. The route you take should depend on your particular circumstances. Everything from your business’s credit score to what you need funding for will be taken into account.

If you are in need of funding for something relating to your small business, you might be trying to decide if a loan or a line of credit would be right for you. Although they share similarities, these two funding options have key differences that should be considered carefully before you make any decisions.

Here are some of the differences between loans and lines of credit for small businesses that will come into play as you make your decision about which option would be the right solution for your small business’s cashflow needs.

Interest

One of the biggest differences between a small business loan and a small business line of credit from Become has to do with the interest paid on the borrowed sum. When you take out a small business loan, you are immediately granted a lump sum that can be used for your small business. No matter how much or how little of that loan you end up using when all is said and done, you must pay interest on the entire amount.

A small business line of credit, on the other hand, works differently. You are granted access to a capped sum and can use however much of that amount that you need when you need to within the agreed upon timeframe. Since you are spending on an as-needed basis, you might never take out the entire amount that you were granted access to. For this reason, you are only obligated to pay interest on the amount that you spend. The rest is simply left untouched and given back to the lender.

This method of borrowing becomes incredibly cost effective when you don’t know right away how much you will need to spend. It is also useful for those who are great at coming up with methods of reducing costs on things. The less of the line of credit that you spend, the more you will save in the long run on interest payments.

Flexibility

Another key difference between loans and lines of credit has to do with how flexible each option is for the borrower. When you take out a loan, you will agree to certain limitations on spending. Most loans are designed and structed for use on certain things, such as equipment. With such a loan, the funds can only be used on equipment for your business.

Lines of credit tend to be more flexible, though. You might find that you take out a line of credit to cover repairs on your business’s property only to find that you also need to use some of it on new equipment as well. This would be perfectly acceptable under the terms of your line of credit.