Small Business Loans vs. Lines of Credit

Business lines of credit and business loans are great options. They can be used for stockpiling inventory, increasing staff for a major event, maintaining cash flow when customers are slow to pay, or purchasing product at a deep discount fast. The great thing is that you can use your business line of credit or business loans to meet short-term working capital needs as needed.

The distinctions between lines of credit and small company loans are numerous. The following are the key factors to consider when making your decision:

Let’s define what each of these terms mean

Business loans: A business loan can be a good choice for planned expenses, such as financing equipment

When you take out a loan, you’re borrowing all the money at once and typically paying it off over several years. 

Business lines of credit: They are meant for business expenditures that you will repay within months or a few years. A business line of credit is better in uncertain times, such as when you might struggle to predict revenue and expenses.

Cost Differences For Business Loans and Lines Of Credit.

Compared to loans, credit lines often offer lesser sums of money. Business loans often have lower costs than business lines of credit. You don’t get the full amount up front with business lines of credit, unlike with loans. When you make a purchase in this scenario, you draw from the line of credit. As opposed to a business loan, where you frequently must state your intended purpose in advance, a business line of credit typically does not need this. A line of credit’s approval could be more challenging than a loan’s. According to Investopedia, lines of credit can be beneficial in Considering this, you must examine all the funding choices available to small business owners if you require more money in one lump amount to finance expansion, inventory, equipment, or other necessary expenses.

How can you qualify for a business line of credit?

You must meet these standards in order to qualify for business credit

  • Annual revenue of $100,000 or more
  • Years in business
  • Credit score (600 or higher)

Let’s take a look at the standard procedure for applying for a startup line of credit. Some requirements include having an excellent credit history, being in business for at least two years, and demonstrating that your company’s revenues are increasing.

So, what should you think about? If you have an excellent credit history, you may be eligible for a startup business line of credit. Otherwise, look for a secured business line of credit, which requires you to put down assets as collateral to secure the loan.

Assets that can be liquidated quickly, such as accounts receivable and inventory, will be preferred by lenders. If you fail to make your payments, the lender may take possession of the pledged assets in order to recoup their investment.

Legal and financial documentation will be required by the majority of funders. To apply, you must gather the necessary paperwork, which can be time-consuming and difficult for you as a small business owner. Commercial leases, government-issued ID, your business license/articles of incorporation, several years of income tax returns (potentially personal and business), and a business plan are typically required.

Is a Business Line of Credit worth it?

You’ll need to create a three-year projection of your company’s revenues and expenses. Include information on how the line of credit will work out for your business.

Furthermore, display detailed information about your accounts receivable, inventory, and all other financial liabilities. Finally, consider how much this will cost you in the long run.

Fees for lines of credit vary by lender and are based on your credit history, the collateral you pledged, and the funder’s transaction servicing charges. You will most likely be charge an annual fee as well as interest on any money you use. Now you may be thinking is a business line of credit worth it.

“A business line of credit can be crucial to help a business take advantage of an opportunity or weather a crisis,” says Gerri Detweiler, education director for Nav, a business credit and financing resource. “It allows you to borrow only what you need, up to your credit limit, and only pay interest on the money you have borrowed.”

 US. News says it to be one of the best tools available for a business owner.

A revolving business credit line allows you to borrow more money as you repay what you’ve borrowed without having to apply for another line of credit. You can use your credit line for as long as your lender allows if you make at least the minimum payments and stay under your credit limit.

What are the Interest Rates for Business Lines of Credit?

Interest rates for business lines of credit have influence in personal and business credit scores. If your credit score is low, your interest rate may be high at first. However, if you use the credit line responsibly, the lender may reconsider the terms. Most lenders use the five C’s of credit to determine the size of the credit line.

  1. Capacity –  measures the borrower’s ability to repay a loan by comparing income against recurring debts and assessing the borrower’s debt-to-income (DTI) ratio
  2. Character- specifically refers to credit history, which is a borrower’s reputation or track record for repaying debts. 
  3. Capital- any capital that the borrower puts toward a potential investment. A large capital contribution by the borrower decreases the chance of default.
  4. Collateral – gives the lender the assurance that if the borrower defaults on the loan, the lender can get something back by repossessing the collateral.
  5. Conditions – length of time that an applicant has been employed at their current job, how their industry is performing, and future job stability.

According to Investopedia, The five Cs of credit is a system for lenders to gauge the creditworthiness of potential borrowers. The system weighs five characteristics of the borrower and conditions of the loan, attempting to estimate the chance of default and, consequently, the risk of a financial loss for the lender.

Here at Mainroad Capital we have a variety of products, including Business Loans and Lines of Credit. We can qualify you in a couple of minutes and have you funded before the 24 hours. Apply Now!

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