Many of us get confused between business loans and business lines of credit. Are they the same? Are they not? If not, how are they different? Well, this article may help clear a few of your doubts regarding them, after which you can get a clearer picture about which one you may want to opt for now or in the near future.
Business Loans:
These are funds offered by traditional lenders such as banks or personal and online loan lenders as well.
Loans for small businesses can be difficult to avail from a traditional lender, since majority of them prefer offering their finances to large scale businesses. Apart from that, they do not accept requests by those who have bad credit scores or ratings that are basically undesirable or not up to their expectations. Even if they do choose to give a borrower with a bad credit rating a chance, they will undoubtedly ask for collateral in order to avoid the risk of not being repaid. This can be hard on one who is just starting off in their businesses and doesn’t have anything major to offer as security, or has a poor or no credit history.
Online loan lenders on the other hand offer funding even to those who have bad credit or no credit history, since that’s not what they take into consideration before approving a borrower’s loan request. Many of them also do not ask for security of any sort which makes it easy for most people to get funded by them.
However, business loans, irrespective of who lends them are different from business lines of credit and tend to offer a higher amount than them as well. Business loans are required to be repaid on specific dates, before which the money is transferred to the borrower’s account in wholesome.
Business Lines of Credit:
Lines of credit are basically a specific amount of funds offered to a borrower who applies for it, which can be withdrawn at any time during a specified period of time. The money given through a line of credit will most likely be lesser than that of a business loan.
Lines of credit can be compared to credit cards in a way, since the withdrawal and repayment terms are similar. However, they can mostly be attained from traditional lenders like banks and not from direct or online loan lenders.
Business lines of credit however, are also usually unsecured which means that one doesn’t have to offer collateral in order to avail them.
Interest rates:
The interest rates (fixed or variable) can differ from lender to lender and the type of loan you choose.
Which Kind is the Better Option for You?
If you’re looking at investing a fairly larger sum of money in a particular aspect of your business such as real estate of equipment, a business loan is the better option for you.
However, if you’re looking at availing a certain sum of money that you may need to use for expenses over time (such as electricity and other costs of running your firm, business meetings from time to time, etc.), you may want to opt for a business line of credit instead.