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Business Loans vs Business Lines of Credit Compared

Business Line of Credit vs. Loan Comparison
Susan Guillory
Susan GuilloryUpdated September 15, 2022
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Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.
If you need capital to start or grow your company, you may be looking at business financing. There are two main types of small business financing to choose from — a business loan and a business line of credit. While both options can give your business the funds it needs, these two loan products operate differently and serve different business needs.A small business loan is a lump sum of capital that you pay back over a specific time period plus interest. Loans can work well for large, one-off expenses like opening a new location or buying inventory. A line of credit, on the other hand, gives you access to a pool of funds that you draw from as needed. You only repay (and pay interest on) the funds you use. Lines of credit can be great for occasional dips in cash flow or handling unexpected expenses.When it comes to choosing a business line of credit vs. a small business loan, however, there are many factors to consider. Here’s a closer look at how these two financing options compare.  

What Is a Business Loan?

A business loan provides a lump sum of capital that you can use to grow your business. Once a loan is disbursed, you are generally required to make regular payments that include principal (the loan amount) and interest accrued for a predetermined time, called the loan’s term.A business loan may have a fixed or variable interest rate. A fixed interest rate, as you might guess, remains the same throughout the term of the loan, while a variable rate fluctuates as market interest rates change. A variable rate loan may start out lower than a fixed rate loan, which is why variable rates can be appealing to some. However, with a variable rate, you risk the interest rate rising over time, especially when a loan term spans several years. 

Types of Business Loans

There are several types of business loans, and each comes with different rates, terms, and qualification requirements.

Bank Loans

You can apply for a loan through a bank or credit union. Typically, bank or credit union loans offer some of the lowest interest rates for business loans. However, they can be difficult to qualify for, and generally take longer to process, than loans offered by online lenders.A bank loan can be secured (meaning it requires collateral) or unsecured (no collateral is required). Secured loans may come with more competitive interest rates, since that collateral lowers the lender’s risk. (If a borrower defaults on a secured loan, the lender can put a lien on the collateral or seize it to pay back what’s still owed). Rates for bank loans vary depending on the bank and creditworthiness of the borrower, but here’s a look at average bank loan rates and terms.
  • Rates: 3% to 7%
  • Loan amount: $5,000 to $5 million
  • Terms: Up to 10 years

Small Business Administration Loans

Another business loan option is one backed by the U.S. Small Business Administration (SBA), which both banks and online lenders offer. SBA loan rates are typically competitive and loan amounts tend to be higher and repayment terms longer than other types of business loans. Plus, the SBA offers a variety of different loan programs for different types of business needs and borrowers. Learn about SBA loans to see if they’re a good fit. Here’s a look at average rates and terms for SBA loans.
  • Rates: 7.75% to 13.5
  • Loan amount: up to $5.5 million
  • Terms: up to 25 years

Merchant Cash Advance Loans

For businesses that don’t qualify for bank or SBA loans, a merchant cash advance could be another option. With a merchant cash advance, a lender offers you cash up front in return for a portion of your business’s future sales. With this type of loan, lenders tend to look more at your cash flow than your credit score. A merchant cash advance can typically deliver funds faster than other loans, but they generally cost more than other types of business financing.Here’s a look at average rate and terms for merchant cash advances.
  • Rates: 1.14 to 1.48 Factor Rate (which roughly converts into an annual percentage rate of 5% to over 100%)
  • Loan amount: up to $500,000
  • Terms: however long it takes to cover the advance you received (plus fees) through sales

Pros and Cons of Small Business Loans

When comparing business loans vs. lines of credit, it can help to first consider the pros and cons of getting a traditional small business loan.

Pros of a Business Loan

Business owners may choose a business loan over a line of credit if they need a large sum of money all at once, maybe to cover a real estate purchase or one-time renovation. A loan can give borrowers those funds upfront.Many small business loans come with fixed interest rates, which can make monthly payments more predictable than financing with a variable rate. Another advantage of a business loan is that you may be able to qualify for higher amounts of capital than you can with a line of credit. And, if you have excellent credit and solid revenue, you might be able to get a bank loan at a relatively low interest rate.Recommended: Average Interest Rates on Business Loans

Cons of a Business Loan

Getting a lump sum of capital all at once isn’t always a good thing. If your business needs some cash now and more later, you could end up paying interest on funds you don’t need quite yet.A business loan also may not be ideal if you’re looking for fast funding. If you apply for a bank or SBA loan, the application and approval process can actually take many months. Online loans can be much quicker to fund, but may come with higher interest rates.Also keep in mind that to qualify for a bank and SBA loan, you typically need excellent credit and, in some cases, collateral. Some business owners may not have a high enough scores or enough business assets to be approved for a traditional business loan. Recommended: Guide to Typical Small Business Loan Requirements 

What Is a Business Line of Credit?

A business line of credit is a form of revolving debt. This means that, rather than receiving a lump sum of capital all at once, you’re granted a maximum amount of money you can withdraw as you see fit. Interest accrues only on withdrawn funds, and you can keep withdrawing as long as you keep the line of credit open. For example, if you are approved for a $100,000 business line of credit and only need $25,000 now, you can take out that lesser amount right away. Later, when you need another $40,000, you can withdraw more funds. You start paying on your line of credit once you take out money against that line. And, you only pay back what you actually borrow. Funds become available again once they’re paid back. There are two main types of business lines of credit: secured and unsecured.A secured line requires collateral in the form of assets such as real estate, cash, or personal property, which the bank will use to recoup the loan if you default on payments.An unsecured line of credit does not require collateral. However, because of the risk to the lender, it is often more expensive than secured line of credit and may have a lower  credit limit.Rates and terms will vary depending on the lender, the qualifications of the borrower, and whether the line of credit is secured or unsecured, but here’s an overview of average rates and terms for business lines of credit.
  • Rates: 4.66% to 47.14%
  • Credit line amount: $1,000 to $250,000
  • Terms: up to five years
Recommended: No Doc Business Line of Credit: What It Is and Where to Get One 

Pros of a Business Line of Credit

A business line of credit can be a great fit if you're just starting a business and/or have fluctuating expenses to cover, since you’ll only pay interest on the money you use. For example, some business owners might simply need access to extra cash during a slow season. A line of credit avoids the problem of borrowing (and paying interest on) more borrowed funds than you need. A line of credit can also work well as an emergency fund. It offers you funds that you can tap if you need them, but you won’t pay any interest on that money in the meantime.A line of credit can also be a good option if you need capital fairly quickly. Compared to a bank or SBA loan, you may be able to access funds faster by getting a line of credit. 

Cons of a Business Line of Credit

If you have a project that requires a large amount of cash to accomplish, a line of credit might not offer you enough capital.Lines of credit also typically have shorter repayment terms, which can lead to high monthly expenses in the short term.In addition, some lines of credit charge fees even when you are not actively borrowing. And, with a secured line of credit, you will need to provide collateral, which can put a business asset at risk.

Small Business Loan vs Line of Credit Compared

Here’s a look at the similarities and differences between business loans and business lines of credit.

Similarities Between Business Lines of Credit vs Loans

  • Access to capital: Both business loans and lines of credit give your business cash to accomplish a goal.
  • Lenders: Both loans and lines of credit are offered through traditional banks, credit unions, as well as online lenders. 
  • Rates depend on your credit: Requirements differ between loans and lines of credit, but with both, the stronger your credit scores, business history, and revenue, generally the better rates and terms you can expect.

Differences Between Business Lines of Credit vs Loans

Funding amounts: Typically, you can get business loans in higher amounts than lines of credit (although this isn’t always the case).Repayment schedules: Business loans usually have fixed payment schedules, and you'll need to start making payments right away. A business line of credit doesn't come with such strict terms. You only make payments after you draw funds.Term length: Generally, business lines of credit have shorter term lengths than loans because they’re designed for short-term business needs. However, some terms can last up to five years.Requirements: Qualification requirements for business lines of credit tend to be more relaxed than requirements for traditional business loans, since financing amounts tend to be lower and terms shorter. However, requirements can vary significantly based on the lender.Uses: A business line of credit is highly flexible – you can use your funds for whatever business expenses come up. A small business loan, on the other hand, gives you a set amount of cash, usually for a specific purpose that you outline in your loan application.Here’s a side-by-side comparison of lines of credit vs. loans:
Business Line of CreditBusiness Loan
Funding Amount$1,000 to $250,000Up to $5 million (bank) Up to $5.5 million (SBA)
UseFlexibleSpecific purpose
Repayment ScheduleRevolvingFixed
Term LengthUp to 5 yearsUp to 10 years (bank) Up to 25 years (SBA)

How to Choose Between Business Loans vs Lines of Credit

So which type of financing should you pick?A line of credit can be a good option if you need flexible funding up to a specific limit and want to repay the debt in small chunks over time. The flexibility of a line of credit also makes it well-suited for an evolving, rapidly growing business that has changing financial needs, such as covering cost of supplies, repairing equipment, or purchasing inventory. A business loan, on the other hand, can be ideal for making your long-term business vision a reality. A loan can allow you to finance a large, one-off expense, such as buying inventory, expanding to a new location, or improving infrastructure.Recommended: Getting a Business Loan as an LLC

Exploring Business Loan Options

There’s no easy answer as to whether a line of credit or loan is best for your business needs. Start asking yourself questions to find your answer:
  • How much money do I need? Loans may be a better choice if a large sum is needed.
  • What will I use the money for? Business loans generally come with restrictions attached to what the funds can be spent on. 
  • Do I need it all at once or spread out over time? A loan amount can be disbursed as a lump sum and a line of credit tapped into only when needed.
  • How much can I afford to pay in loan payments each month? A line of credit could require fewer payments, if only some of the approved financing gets withdrawn.
  • When do I need the financed money? If you need access to funds at different times, a line of credit may offer more financing flexibility — as it can be tapped when needed.
  • What financing options do I qualify for? If you’re not certain whether you qualify for a business loan or line of credit, you can research different lenders' requirements to get a better idea of the various factors they weigh.
Even once you’ve done your research and gathered all the business loan and business line of credit information you can find, you’ll then need to determine which lender you want to work with. Qualification requirements will vary from one lender to another, as will rates, terms, and amounts you can borrow.

Business Loans That Suit Your Needs

Both business lines of credit and business loans can assist with maintaining cash flow and having reserves when it’s time to grow or even out your revenues. It can be a good idea to spend time comparing business lenders, both traditional and online, to find the option that is most affordable and suits your current business needs.Let Lantern by SoFi help you get the capital you need.

Frequently Asked Questions

What are the requirements to get a business line of credit and are they different from business loan requirements?
Will a business line of credit show up on a credit report?
How long does it take to get a business line of credit and is it faster than getting a business loan?

About the Author

Susan Guillory

Susan Guillory

Su Guillory is a freelance business writer and expat coach. She’s written several business books and has been published on sites including Forbes, AllBusiness, and SoFi. She writes about business and personal credit, financial strategies, loans, and credit cards.
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