Differences between Business Loan and Business Line of Credit
A business loan and a business line of credit have many similarities: both have similar requirements, both are ways to fund your business, and both are often by a variety of banks and alternative lenders.
Fixed term loans, SBA loans, asset-based lending - these are all examples of different types of business loans. A term loan is the common structure of most business loans. A term loan is when you receive a lump sum that has a specific repayment schedule with either a fixed or floating interest rate.
Term loans can have varying loan amounts, ranging from $500 to $5 million dollars.
The repayment terms also vary:
Short term loans - Usually within a year
Intermediate term loans: 1 to 3 years
Long term loans - 3 to 25 years
Businesses will need to fulfill a lot of requirements to be considered for most loans. Aside from the extensive financial documents, you will need to have a detailed business financial plan.
Usually a minimum credit score of 680, at least 3 years of being in business, and $300,000+ in revenue is a good benchmark to qualify for most business loans. The less risky your business appears, the more favorable your loan terms and conditions will be.
Business Line of Credit
A business line of credit is a flexible financing method that gives you a certain amount of cash and you choose how much money to withdraw. You only need to pay interest on the amount withdrawn. A revolving line of credit, in particular, will refresh the original total once you pay back the amount withdrawn.
The total amount of a business line of credit can range from $1,000 to above $500,000. The repayment term lengths will also depend on your agreement with your lender, ranging from 6 months to several years.
The minimum qualifications for most lines of credit will be being in business for at least 6 months and $25,000 in annual revenue. A minimum credit score will vary by lender, usually within 500 - 630. The higher the credit limit is for your business line of credit, the more likely it will be for lenders to require collateral, which can be your company’s assets or a personal guarantee.
While lines of credit are useful for short-term expenses, businesses can also use a line of credit to deal with emergencies or unexpected situations quickly. Rather than a one-time short-term issue which is best suited for a term loan, business lines of credit also cover ongoing operating expenses.
Why Use a Business Loan?
Better for one-time or specific purchases
You prefer having a set repayment schedule with a fixed or floating rate
You need a large amount of cash
If your business has favorable qualifications, it can be easy to qualify and obtain better business loan terms and conditions
Why Use a Business Line of Credit?
Usually easier to qualify for a business line of credit over a business loan
Usually has a quicker qualification process, which means faster funding
You only need to pay back the amount drawn, which makes it ideal for smaller purchases
By drawing smaller amounts, it is possible to bolster your credit score by reliably paying back the line of credit
Business lines of credit have no restrictions on their usage
A business line of credit initially has a lower interest rate and you are confident you can repay
Accel Business Funding has many different funding options for all businesses and funded many businesses for more than $380 million. When banks say NO, we say YES to funding in 24 hours!