Business loans and business lines of credit are popular financing options for business owners. But what exactly are they? And how do they work? And which of the two business financing options is best?
Below, owners of small and medium enterprises (SMEs) can learn more about the two types of borrowing products for businesses with our guided comparison of business loans and lines of credit.
Below, any mention of business loans, business term loans, or term loans refers to the same thing: loans that are fully repayable over months according to an amortization schedule.
Business loans are best suited for more considerable expenses or projects, while business lines of credit provide ongoing access to capital, assisting with short-term financing needs that can also help bridge cash flow gaps.
Term Loans are provided to business owners in a lump sum, while business lines of credit offer regular access to the predetermined credit limit, like a business credit card.
A business term loan is an installment credit product that closes when fully repaid or reaches maturity.
On the other hand, business lines of credit does not have a maturity date and remains open at the lender or borrower’s discretion. However, the lender will perform regular review in a specific frequency to assess the borrower’s capacity to repay.
Business loans vs. business lines of credit at a glance
Comparing products is a fundamental step for any business owner seeking business financing. Let’s take a closer look at business term loans and lines of credit.
Business term loans
Business lines of credit
Amount of financing provided
Larger, depends on the type of loan
Access to smaller amounts of capital, with the ability to receive a limit increase if the account is in good standing
Credit score, business history, collateral, business plan, meeting with financial institution’s relationship manager
Credit score, business history, financial statements, collateral
Types of financing
Secured and unsecured, start-ups, new companies, commercial real estate, working capital, business acquisition, equipment investing, purchase orders, technology purchase, and more
Secured and unsecured, start-up
Interest charged on the entire amount at a fixed or variable rate
Interest charged only on the amount used
Regular installments, usually biweekly or monthly
Interest charged only on required payments
Business loans: Overview
A business loan is a lump sum of money lent to a business owner by an institution, such as a bank, credit union, government agency, online lender, or alternative lender.
Generally, business term loans are best suited for projects with larger expenses. Reasons to get a business term loans can include purchasing real estate, land, or inventory, renovations, equipment purchases, repairs, and upgrades, among other business-related expenses.
How a business term loan works
Business term loan recipients must repay the entire sum in full, with interest, typically on a biweekly or monthly basis.
A business term loan comes with a variable or fixed interest rate, and getting the best and lowest rate possible should be a top priority. Getting a higher than ideal rate can hinder your ability to repay it and your business’s success, should you experience financial challenges. Also, it’s important to consider some institutions may charge fees in addition to interest.
The amortization period, another important factor, is how long it will take you to repay the loan. Longer amortization periods mean the business owner will take longer to repay the loan, with less less stress on cash flow but more interest paid to the lender.
Depending on the institution, your credit score, and the type of loan, collateral may be required from the borrower.
Types of business loans
Various types of business term loans are available, with certain options best suited for specific projects. Some common types of business term loans include start-up, working capital, equipment financing, business acquisition, and commercial real estate loans, among many others.
Pros and cons of business loans
Lower interest rates
Usually requires collateral
Fixed payment schedule
Strenuous application process with higher credit requirements
Higher amount of funding often provided
Specific loans must be used for the reasons agreed with the lender
Access to the entire amount at once
Interest accrues immediately
Many borrowing options with specific uses
Business lines of credit: Overview
A business line of credit is a revolving credit product allowing business owners to withdraw funds on a predefined limit.
Interest rates can be fixed or variable, with the latter changing at the borrower’s discretion, typically according to the prime rate.
How a business line of credit works
Business lines of credit allow business owners to withdraw funds and make repayments on an ongoing basis.
Unlike business term loans, business lines of credit do not require the loan recipient to make scheduled payments but requires payment of interest on the amount used, usually every month.
This option makes lines of credit typically a little more flexible than business term loans, which have a predetermined repayment schedule.
Types of business lines of credit
Two types of line of credit options are available to business owners: secured and unsecured.
A secured line of credit requires collateral at a lower interest rate but with qualification requirements.
An unsecured line of credit does not require collateral and has lower qualifying conditions, but may come with a higher interest rate and lower limits.
Pros and cons of business lines of credit
Amounts disbursed can be smaller
Smaller minimum payments
Interest rates can increase
Doesn’t require full sum withdrawal
Self discipline for use and repayment
Can be used for all types of expenses
Impact on credit score
Collateral not always required
Higher interest rate than business loans
Only charges monthly interest on the amount used
Where can I get a business loan or line of credit?
Many institutions or lenders will offer small businesses and medium-sized businesses options for both lines of credit and loans.
However, with so many options available, and factors for said options, it can be challenging and even overwhelming to make the correct decision.
That’s why Cubeler is a great option for small and medium-sized businesses looking for financing options.
Cubeler members can connect their accounting software by activating Cubeler-Link™ and views dozens of preapproved business term loan and line of credit options.
Learn more by signing up for a free account today, and apply for the borrowing products your business needs in a matter of minutes.
Final thoughts: Business loan or line of credit?
Loans and lines of credit for SMEs are equally useful borrowing products. But of course, like any other financing product, it depends entirely on your business’s specific needs.
What are the typical interest rates for business loans and lines of credit?
Rates on business financing products can vary immensely, depending on the type of product and lender. However, typical rates for business term loans and business lines of credit start at about 4% or higher.
What types of businesses are eligible for business term loans and lines of credit?
All loans have their own requirements. However, businesses with at least 12 months of revenue can apply for a loan, while new businesses with less than 12 months of revenue can apply for a loan through specific programs.
Most businesses with a strong credit history can apply for a line of credit.
Do business term loans or business lines of credit affect credit scores?
Yes. Business financing can impact your credit score. Being declined and missing payments can negatively impact your score, while approval and making payments can improve your credit score.