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Small Business Loan vs. Small Business Line of Credit: Which is Better?

When your business needs money, the financing option you choose can impact your business in various ways. So, which is better for your business: a small business loan or a small business line of credit?

When Should You Get a Small Business Loan?

A small business loan is a type of business financing where a lender provides your company with an amount of money you agree to pay back (with interest) per the loan’s repayment terms. Business term loan lenders typically require excellent credit scores and collateral or personal guarantees from borrowers. In exchange, you make predeterminedsmall business line of credit monthly payments throughout the life of the loan, which can range from 10-25 years. Because the loan amount is usually significant, leading to the company taking on a large debt, most small business owners use a small business loan for larger purchases, such as buying property, expensive equipment, a large amount of inventory, and debt refinancing.

You can find small business loans through most banks, credit unions, and online lenders. Also, the Small Business Administration (SBA) offers several kinds of SBA loans through a network of approved SBA lenders.

Advantages of Small Business Loans

Since a small business loan is not an easy type of financing to get approved for, many often come with low-interest rates. Other small business loan advantages include:

  • Long-term financing: Especially when growing your business, you may appreciate the longer time period you have to pay back the loan.
  • Lower payments: Also, your monthly loan payments are more affordable because you have more time to pay back the loan.
  • Improved credit score: Long-term loan payments made on time show the credit bureaus your business is financially responsible and help build your business’s credit history. Also, a large credit limit improves your business’s credit utilization ratio.

Disadvantages of Small Business Loans

Besides the strict eligibility requirements, the disadvantages to obtaining a small business loan include:

  • Collateral or personal guarantee: Most small business lenders want to secure the loan with some type of collateral or personal guarantee, which means you could lose those assets if your company defaults on the loan.
  • Missed payments: The length of the loan agreement increases the possibility that your company could not afford to make the monthly payments sometime in the future. Missed payments have a substantial adverse effect on your credit score.
  • Tedious application: Because small businesses are considered high risk for lenders, applications tend to be long and detailed, and loan approval could take weeks to months. If your company needs money in a hurry, consider applying for a small business line of credit.

When Should You Get a Small Business Line of Credit?

A small business line of credit is typically a short-term loan available from lenders for smaller sums to be used for business expenses such as covering bills during a cash flow shortage. A business line of credit can function as emergency working capital ready to tap when a funding occasion arises.

Small business lines are revolving credit. Similar to a credit card, borrowers are approved for a preset lump sum and can use any amount of the money (up to the credit limit) for any need. Then, borrowers make payments until the money is paid back and only pay the interest rates on the borrowed sum. Also, like business credit cards, once the money has been repaid, it is available to borrow again.

 

There are many reasons a small business owner might seek out a small business line of credit instead of a small business loan.

Advantages of Small Business Lines of Credit

Depending on the business’s credit history and the purpose for the loan, advantages to a small business line of credit include:

  • Simpler application: Business loans and lines both require applications; however, the application for a small business line of credit tends to be shorter and easier to fill out.
  • Smaller amounts: Many times, small companies choose a small business line of credit because they want to have money on hand as a backup emergency fund for seasonal fluctuations or while waiting for a significant invoice to be paid. A small business line of credit is a short-term loan, so it tends to be for smaller amounts, which is easier to pay back.
  • Improves credit score: Although the loan isn’t a long-term commitment, it still shows lenders that your company is financially responsible and can make payments on time.
  • Quicker approval: Because the application is less complicated, and the amount of money lent is lower, most small business owners can get approval within a few days.
  • Revolving credit: A small business line of credit is a revolving loan, which means once the money is paid back, it is available to borrow again without having to reapply for a loan. Plus, you only pay interest and fees on the amount withdrawn.
  • No collateral or personal guarantee. Finally, most small business lines of credit do not require collateral or a personal guarantee.

Disadvantages of Small Business Lines of Credit

The biggest challenge borrowers have with access to immediate cash is using their small business line of credit for unnecessary purchases. Think about why you want a business line of credit and only apply for the amount you need in the event of a cash shortage.

Although they have lower interest rates than business credit cards, small business lines of credit typically have higher rates than traditional business loans. Therefore, think about how much money you need in the short term and how much your business can afford to pay back.

Which Financing Option is Better for Your Business?

Deciding on a funding solution means doing your homework and talking to your accountant about the type of financing that makes sense for your business’s needs.

Financing Solutions is an alternative lender that offers an easy application process (it takes less than two minutes to fill out) and requires no collateral or documentation to get a written offer letter. Other alternative lenders have a much longer application process and may be relatively expensive.

The founders of Financing Solutions have started and grown several companies together, so we understand how important it is to keep costs low. That’s why we don’t charge you to set up the credit line, and there are no maintenance fees. We don’t ask for personal guarantees, and applicants can receive a no-obligation offer letter the same day. We make approval decisions based on our decade of experience working with small businesses. Find out today why we have five-star ratings from the Better Business Bureau and Google. Also:

  • There are no costs to set it up or keep it in place
  • The easy 2-minute application online application
  • If approved, you’ll receive a same-day, no-obligation offer letter
  • The fastest setup, 48-72 hours
  • Once you have the line of credit, requests for funds are wired to your bank in minutes
  • You can use your line of credit whenever needed
  • Inexpensive when used (low fees)
  • There are no restrictions in place or collateral required
  • No personal guarantee is required, either
  • Financing Solutions is a leading provider of lines of credit
  • We are a reputable company with an A+ & 5-star rating
  • You can pay off the line whenever you are ready
  • The credit line is easy to renew and renews yearly
  • You have a secured account portal access 24 x 7

A small business line of credit is a good funding resource that’s available whenever your company needs it, without the heavy burden of term loan requirements. If you want to see if your small business would be approved and for how much, p

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