Business line of credit vs loan

Business line of credit vs loan

This article explains 8 differences and the benefits between business line of credit and business loans.

1  A Business Loans.

You can apply for a particular amount of business loan and get it one at a time if approved, while a business line of credit is applied for once, after approval you may not have a particular limit to the amount you can withdraw. it can be used multiple times.

2. When You Obtain a Business Loan has Different from When You Obtain a Business Line of Credit

A business loan is usually needed for a particular purpose and you may not be in need of it unless the purpose arises. Whereas a line of credit is credit facility you obtain before the need ever arises . You need to know that the business line of credit, unlike a business loan, is not for 1 specific purpose.

3. Business Loan attracts a Monthly Payment

With a business loan, you make payment on a monthly basis, however we have few exceptions.  The loan monthly payments starts immediately. Whether you are utilizing all the loan amount or not your monthly payments doesn’t change. With a business line of credit, interest payment is made on the amount of money you have actually used or withdraw. If your credit balance is 0 your payment is 0.

4. Business Loan Closing Cost is Higher than that of a Business Line of Credit

Though, there are exceptions, but most business loans carries closing cost ranging from two to seven percent. Whereas business lines of credit have very little or no closing cost. Closing cost and other cost are serious determinant factor in business line of credit vs loan.

5. Business Loans has Amortization Periods or Fixed Terms

Because of the amortization Periods the monthly payments on loans are normally higher compared to the monthly payments on business lines of credit. But Business lines of credit has no fix term.

6. Business Loan is good for Long Term Purpose

Business loans are normally good for long term debt which get paid off gets paid off over 2 – 6 years. Business lines of credit, on the other hand, are good for short term purposes like marketing, staff salary payment and financing receivables. Yes! lines of credit are excellent for unexpected cash flow problems but make sure you do not exhaust your lines of credit on business surprises. Utilize your line of credit particularly for revenue generating activities.

7. Business Loans Attracts a Higher Interest Rates

Business loan attracts a higher interest rate. However, this interest rate are fixed. Business lines of credit usually attract lower interest rates but varies from one business line of credit lenders to another. This means that if you manage your business lines of credit badly by paying late or going over the business credit line, then from an interest rate point of view, it should have been better if you had gotten a loan. However, with a business line of credit the interest rate can normally get better with better credit management.

8. A Business Loan is Interest Rate Driven, While a Business Lines of Credit is Not

Business loans are normally interest rate driven except with some exceptions, whereas, lines of credit is not so interest rate sensitive.

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