Business Line of Credit

A business line of credit is a debt financing arrangement between a business and a commercial bank, allowing the business to draw on the line when necessary. A typical line of credit might be for $100,000 or more and can provide for a variety of purposes including working capital, inventory, equipment purchases, and real estate development. Banks market lines of credit as risk-free because they require that you only pay interest when you use them.

Business Loan

A business loan is when you borrow one lump sum from a lending institution such as your local bank or finance company. With this type of loan, you will have fixed monthly payments over an agreed-upon time frame before which you must finish paying off the money borrowed plus any accrued interest. This repayment schedule allows businesses receiving loans to plan accordingly, as opposed to a line of credit that can cover business costs on an as-needed basis.

Business Loan Benefits

Many small business owners are wary of seeking financing through traditional channels, such as bank loans. While these options offer financial stability for growing companies, there are some drawbacks. 

Making payments on time can cause money to build up in the account. Before you know it, your account is overdrawn and that's where bounced check fees come into play. These are just some of the many reasons why you shouldn't rely on bank loans to finance your business. Business loans can be a better option for cash flow, but it's important to pursue them responsibly.

The best part about business loans is how quickly you can receive your money. As soon as you are approved, the funds are available for use. This is good news for small businesses that need to make purchases to know the difference between them and traditional bank loans.

With a business loan, you still have access to cash when needed. The money is paid back over time according to a set plan. Keep in mind, the repayment of a business loan takes longer than that of a bank loan. This is because you pay back both the principal and interest over time. In contrast, bank loans only require that you repay the principal amount of money borrowed with monthly payments.

For example, if your company is looking for $10,000, a bank loan might provide you with the cash flow necessary to continue operating. However, it's important to consider the long-term consequences of being under so much financial strain. If your company is unable to repay the money borrowed after a certain period, you'll have still face penalties and fees for failing to meet repayment deadlines. On the other hand, you'll receive $10,000 and the ability to pay the money back over time without worrying about interest rates and penalties.

Business Line of Credit Benefits

There are numerous benefits to having a business line of credit. The first benefit, as evident in its name, is that it allows you access to cash whenever you need it. It's not uncommon for companies to face unexpected expenses or even experience a dip in sales unexpectedly. A business line of credit allows you to borrow against future earnings at any time. With the average interest rate on commercial lines of credit sitting around 3.5%, this is a much cheaper alternative than taking out a loan through the bank, especially for small businesses with high-risk factors.

One of the most significant benefits of having a business line of credit is that you can get the cash you need without putting your personal assets on the line. Because small business loans are secured by your company's accounts receivable and inventory, defaulting on your payments will put your livelihood in jeopardy. However, with a commercial line of credit, only the company is at risk if payments aren't made.

The most significant benefit to having a business line of credit is the option to borrow against future earnings. This not only benefits your company in times of crisis, but it allows you flexibility with cash flow and loan repayment periods which typically range from 6 months to 5 years.

You should consider the following:

• Would improving cash flow help grow your company?
• How does your business loan benefit from having access to cash?
• Would improving cash flow help grow your company?
• What are the risks of putting personal assets on the line?

If you can answer these questions with ease, then chances are a business line of credit is the right choice for your company. As with any financial decision, be sure to consult an accountant or a financial advisor to help you make the best choice for your business and personal situation.

One major difference between the two lending options is that, with a loan, you pay back more than what you borrowed (there is interest involved). With a line of credit, monthly payments are only applied to the amount used (the principal) and not invested (interest). Having some money in savings can make all the difference for your business. If your business closes unexpectedly, the risk protection offered by a line of credit might be a better option than a loan because you will have already saved up your own capital. Before signing any contract it may help to check with a Financial Consumer Agency. You can also visit the CFPB website for more information about the United States credit system.

Conclusion

Both a line of credit and a business loan can be helpful in financing your business. A line of credit is more flexible because you only pay interest on the amount you borrow, and it can offer some risk protection if your business unexpectedly closes. A business loan has a fixed repayment schedule and you pay back more than what you borrowed, but it might be a better option for businesses that have already saved up their own capital. Before signing any contract, it's important to consult with a finance professional.