Small Business Loan vs Line of Credit: Which One Should I Pick?

Businesses require funds for its growth and daily operations. Two of the most popular financing options are Small Business Loans and Line of Credit. Most business owners are often confused as to which credit instrument is more beneficial for them. A quick review of these financing options can help you make a well-defined choice while taking credit for your business.

Small Business Loans

A small business loan is of great help when you are in need of a large amount of money. It can be used for purchasing equipment and inventory, business acquisitions, introducing new branches, etc. With the increase in the number of financial institutions, availing a small business loan has become a hassle-free process. By comparing various loan offers offered by different financial institutions, it is possible to avail a small business loan at the most competitive interest rate.

Financial institutions check various aspects before sanctioning the loan. Due to its stringent eligibility criteria, many start-ups do not qualify for a business loan.

While applying for a small business loan, it is essential that you read all the terms and conditions of the loan agreement carefully. This will help you avoid any inconvenience in the later stages.

Line Of Credit

A line of credit is an agreement between the financial institution and the entrepreneur where the lender assures to lend a certain amount of money to the entrepreneur. Line of credit usually come for longer duration and has flexible repayment options. All these features make the business line of credit a popular source of funding for small scale businesses.

Line of credits are the most viable funding option if you are need of urgent capital. Some of the most common reasons for availing funds through line of credits are mentioned below

  • Managing the expenses during an off-season
  • Payroll
  • Emergency expenses
  • Paying outstanding bills
  • Covering expansion costs

Small business loan vs line of credit

In a business loan, the fund is received at once whereas with a business line of credit, funds can be received in a number of small parts. The repayment method is also different in both cases. In case of small business loans, the repayment is done in the form of monthly installments (EMI). The repayment of Line of Credit depends on the amount withdrawn and the interest is charged on the same. It may vary from one month to another.

In order to figure out the better way of financing your business, you should evaluate the reason behind availing the funds. If you require a large amount of money which is to be used at once then it is better to opt for a business loan. On another hand, if you looking for uninterrupted cash flow in your business or you are uncertain about the amount needed, then a line of credit is a better financing option. It is essential that you assess all the aspects of your business requirements and choose the right financing option.