Small Business Loan vs. Line of Credit: How to Make the Right Choice?

Flexible financing is critical for the growth of your business. Depending on the type of business, you may have to choose between a small business loan to cover one-time expenses or a line of credit for recurring costs. How do you make the right choice? Let’s find out.

How does a small business loan work?

A small business loan provides a one-time infusion of fundsinto your business. It comes with a fixed repayment period with interest payable on the entire amount. Moreover, specialised business loans can only be usedfor specified purposes including buying capital goods, paying wages or running marketing campaigns.

It is the ideal option if:

• you need to borrow a fixed amount for big-ticket expenses
• you have a large business purchase to make in the short-term 
• have predictable long-term expense

How does a Line of Credit work?

A line of credit is a longer-term alternative to a business loan. It can be used on an as-needed basis up to the credit limit.You can carry a balance just like a credit card. The best part is that you only pay interest on what you use.

A Line of Credit works best if:

• you don’t know how much money you need
• need ongoing access to funds over a period of time 
• have cashflow problems due to unpaid invoices or recurring expenses

What are the Key Features of Business Loans versus Lines of Credit?

Business Loans:

• Small business loans allow repayments on a weekly, fortnightly, or monthly basis.
• There may be charges for early repayments
• Minimal documents needed for loans below $150,000

Line of credit:

• You can draw as needed over a typical term of 3-36 months
• Interest is only payable on the amount utilised
• Additional repayments can be made towards the principal
• No collateral upfront required for credit limitsof up to $150,000

Small business loan versus line of credit: How to make the right choice?

The key is to assess how much money you need, what you intend to do with it and then choose accordingly. However, there are also other factors you need to consider:

Collateral:

Some lenders may require collateral for approving a small business loan. However, you can get a higher loan amount and better interest rates compared to a line of credit. On the other hand, a line of credit is unsecured debt and can have a higher interest rate.

Purpose:

Unlike small business loans, a line of credit can be used for virtually any purpose.

Repayments:

Small business loans require fixed repayments while with a credit line you can decide what to pay.

 

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