If you seek a financial advance to open and expand your business – you might face a dilemma between a business loan and line of credit. Although, both of these credit facilities come with a unique set of benefits, understanding the difference between these two is of paramount importance. This is because a proper understanding of the difference between business loans and line of credit can help you utilise an advance to cater to your financial requirements.
Line of credit vs. business Loan
Both lines of credit and business loans allow customers to borrow funds to meet financial requirements. The primary difference between lines of credit and business loans is how you procure the money and the method of repayment.
- Business loan
A business loan refers to a hefty sum which is repaid over a predetermined tenor with fixed interests. Loans are amortised, which means that every payment is of the same amount.
- Line of credit
Lines of credit are revolving credit facility that allows borrowers to draw and utilise funds up to a certain limit, repay this amount and then spend again. A prominent example is a credit card.
Both business loans and lines of credit can be beneficial when managing business – depending on the financial situation. A line of credit offers flexibility when it comes to repayment. Usually, a borrower makes a minimum payment, either pay the balance in full or pay interest on the balance one carries.
On the other hand, loans can be a potentially cost-effective source of business finance as well if you know the exact cash requirement. With all the loan costs brought upfront, a business advance provides you with the option to fix the budget for monthly and overall outgo.
Taking the help of these offers and planning your payments, a borrower can prevent unexpected interests to build up.
Which source of business finance should you opt for?
Categorically speaking, a line of credit proves fruitful for small, unanticipated expenses or to even out cash flow. These can finance your working capital and help maintain cash flow along with the funds for day-to-day expenses with ease. A line of credit acts as a revolving advance, where you can borrow, as many times from the preset limit. If a borrower repays the amount before the due date, no interest is incurred. However, if the amount withdrawn from is not repaid before the deadline, you can repay it in interest-only EMIs (on the borrowed sum).
On the other hand, business loans prove advantageous for one-time big-ticket investments and purchases. The best time to avail a business loan is when you are considering buying equipment or expanding your operations. Such a loan comes with a fixed or floating rate of interest. But, in both the cases procured sum is fixed. Furthermore, loans allow you to limit your borrowed amount upfront rather than withdrawing multiple times from an open balance.
Things to keep in mind
If you are applying for a business loan:
- You have a specific amount to borrow
- You want predetermined repayment cost
If you are considering a line of credit:
- You need revolving access to cash
- You require payment flexibility
Whether you procure a loan or a line of credit depends on your requirement and the way you will utilise the fund. Before applying for business loans or lines of credit – it is essential to consider the amount of financing you will need in the short and long-term. Also, consider the condition of your credit, which will help you make an informed decision.