Small Business Loan VS Line of Credit : Which is Better?

Starting and proliferating a small business requires an uninterrupted flow of cash throughout. Inadequate capital can stunt one’s business growth and journey, and when your business demands financial boosting, you usually have two options to choose from – Instant cash loans and line of credits. Choosing between these two options can prove to be a dilemma for most small business owners. Cash loans might seem like a lucrative option – however, it might have negative repercussions on your creditworthiness in the long run. Hence, to help you make a more informed decision regarding these two financial tools here is an in-depth insight regarding the same.

What is a Business Loan?

A business loan is a short term personal loan in which you can avail a lump sum amount at one go. Such loans usually come with fixed interest rates and a fixed tenure. The lender and the borrower arrive at an agreement that a specific amount of money is to be paid by the borrower by the end of the tenure. Small business loans can be repaid in monthly, quarterly, half-yearly, or annual instalments, and are provided at fixed interest rates that vary in accordance to degree and availability. Business loans are secured loans, wherein the loan amount is dependent upon the borrower’s repayment capacity and collateral value. Business loan collaterals can come in the form of business assets, such as real estate, equipment, residential property, etc. Procuring a business loan becomes easier when your business has an excellent credit history.

Business Loans – Pros

1. Lump-Sum Loan Amount: Business loans can be extremely advantageous for those who require a huge amount of money. The procured loan can be used to purchase inventory items, various business equipment, and expand your business outlets and reach.

2. A Pre-fixed Payment Amount: Business loans are instalment based loans, akin to home or personal loans, wherein the borrower needs to pay a fixed amount within a stipulated interval of time. Also, the borrower can adopt a financially disciplined attitude towards loan repayment due to fixed EMI rates.

3. Fixed or Variable Rates of Interest: When it comes to business loans, the borrower has the option to choose between a fixed or variable interest rate. Post carrying out an in-depth market study, and taking a stock of one’s own preferences, business owners can choose between the two.

4. Flexible Repayment Plans: The repayment of a business loan can be carried out at flexible intervals. Unlike home loans or personal loans, wherein a default monthly instalment is involved, business loans provide you with the option to choose exactly how much you wish to pay back and by when, with options for monthly, quarterly, half-yearly, and annual instalments.

Business Loans – Cons

1. Getting A High Amount is Difficult: It can be extremely difficult to obtain a high amount for a business loan, as the lender checks the borrower’s eligibility and creditworthiness before deciding to sanction the loan amount. Even if you are eligible for a business loan, you might not get it as your business plan might not satisfy the lender.

What is a Business Line Of Credit?

Just like a credit card, a business line of credit is a revolving credit based on an agreement between the lending institution and the individual. Here, the lender assures the borrower a certain amount of money, which the latter can obtain as and when he/she requires the same. The borrower needs to pay interest on the withdrawn amount, and they can maintain the balance by repaying the same. Funds can be accessed from the line of credit as long as the maximum amount limit is not crossed. In order to avoid paying a higher interest, one has to carry out minimum monthly payments. A business line of credit is generally used for longer durations, such as 10 to 15 years.

Line of Credit – Pros

1. Only Pay Interest on Amount Used: Unlike a business loan, one needs to pay interest solely on the withdrawn amount. The credit burden falls upon the actual amount used, instead of the whole lump-sum amount.

2. Provision to Renew: Line of credit loans are renewable forms of credit, in which, one can maintain balance and renew credit lines for the future by withdrawing money and paying it back.

3. Make Withdrawals at Any Time: On renewal of a business line of credit with a stipulated balance, one can withdraw any amount at any point of time. This amount can also be used for everyday business expenses or contingency situations.

Line of Credit – Cons

1. Not a Good Option For Large Purchases: A line of credit might not be suitable for larger purchases. There is no point in taking a line of credit and using the balance at one go. If you do so, the advantages that come along with a line of credit will go to waste.

2. Unpredictable Repayment Amount: Unlike a business loan, you cannot be sure regarding the exact repayment amount of your line of credit loan. The payable depends upon the monthly amount used, hence, charting out a budget becomes tough when it comes to repayments for this kind of loan.

To gauge which is a better method of financing, one needs to evaluate their respective financial needs and long-term business goals. If you require an instant loan for your business, then, it is better to opt for a business loan. On the other hand, if you require extra funds for uninterrupted cash flow, then a line of credit is an optimum option for you.