Line of Credit or a Loan?

Which makes the most sense for your business

When deciding between a line of credit or a loan for your business, it's important to consider your specific financial needs and goals. Both options have their advantages, and the right choice depends on factors like how you plan to use the funds, the amount you need, and your repayment preferences.

Here’s a look at how each option works and when you might consider each option:

Business Loans

A business loan provides a lump sum of money that you receive upfront and repay over a set period with interest. Business loans typically have interest rates ranging from 6% to 15%, with repayment terms of 2 to 10 years. Interest is charged on the entire loan amount from the start, regardless of when or how you use the funds.

Business loans are best suited for:

    •   Specific, one-time purchases or investments
    •   Large expenditures, such as buying equipment or real estate
    •   Long-term projects or expansion plans
    •   Situations where you need a high loan amount (often $500,000 or more)
    •   Businesses that prefer fixed monthly payments and a defined repayment schedule

Business Lines of Credit

A business line of credit, on the other hand, provides access to a set amount of funds that you can draw from as needed. Lines of credit usually have interest rates between 8% and 60%, with repayment terms ranging from 6 months to 2 years or more. You only pay interest on the amount you use, which can result in lower overall costs if you don't need the full credit limit.

This option is more flexible and may be better for:

    •   Ongoing or recurring expenses
    •   Managing seasonal cash flow fluctuations
    •   Covering unexpected costs or emergencies, like equipment repairs
    •   Smaller, more frequent purchases, like supplies
    •   Covering payroll
    •   Adopting new technology
    •   Financing marketing campaigns
    •   Improving creditworthiness

Key Differences

While you can used either a business loans or a line of credit to access funds, there are some important differences between them worth noting. For example: 

1. Funding amount and flexibility: You can pay back and "re-borrow" from a line of credit, giving you a cash cushion when your business needs it. In the case of a loan, funds are disbursed fully up front. If more money is needed, you need to reapply. 
2. Interest charges: Loans charge interest on the full amount whether you need it all or not. Lines of credit only charge interest on the amount drawn.
3. Repayment: Loans have fixed monthly payments, while line of credit payments vary based on the amount borrowed.
4. Flexibility: Lines of credit offer more flexibility in terms of when and how much you borrow.
5. Qualification: Lines of credit often have easier qualification requirements compared to traditional business loans.

Making the Right Choice

To determine which option is best for your business, consider the following:

1. Purpose of funds: If you need money for a specific, large purchase, a loan might be more appropriate. For ongoing expenses or cash flow management, a line of credit could be better.
2. Amount needed: Loans are typically better for larger, fixed amounts, while lines of credit work well for smaller, recurring needs.
3. Repayment preference: If you prefer predictable payments, a loan might be the better choice. If you want more flexibility, consider a line of credit.
4. Cash flow patterns: Businesses with seasonal fluctuations may benefit more from a line of credit.
5. Credit score and qualifications: Your credit score and business financials may influence which option you're more likely to qualify for.

In some cases, using a business loan in combination with a line of credit can provide the best of both worlds. You could use a loan for major investments and keep a line of credit available for managing day-to-day expenses or unexpected costs.

Ultimately, the choice between a line of credit and a loan depends on your business' unique financial situation, needs, and goals.

To determine the most suitable option for your business, contact a member of our Commercial Lending Team.