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Should you get a business loan or a line of credit?

3 min read
getting a small business loan

Looking for funding but trying to decide between a line of credit and a small business loan? Each type of funding has its ideal uses, and knowing what those are can help you figure out which option is right for your business. Here’s how they compare.

Is a business loan right for you?

Business loans are funded in a lump sum and repaid over an agreed-upon period of time. Before you decide whether a business loan is your best choice, it helps to know whether you need long-term or short-term funding.

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A long-term business loan works best for bigger investments, like buying real estate or equipment, making major renovations or improvements in your business, or buying another business. These big-ticket items can take several years to pay off, so the long-term loan is usually your best bet.1 A long-term loan can have a repayment period of 3-5 years2 or longer.3

Shorter-term funding can be used for smaller investments and expenses, like marketing campaigns and smaller remodeling projects, or to help manage cash flow. Loans with a short term are typically 1 year or less. QuickBooks Capital, for example, offers funding with repayment terms up to 12 months.

You can opt for a traditional bank loan with a longer repayment term or shorter-term funding from an online lender. You can also apply for a shorter or longer-term loan backed by the U.S. Small Business Administration.4

How to choose

Knowing how you’ll use the funds is a major factor when you’re trying to decide. But also consider the following:

Costs – A business loan typically has a fixed interest rate over the life of the loan, meaning your payments will stay the same.5 Carrying a long-term debt – whether it’s a loan or line of credit – means you’ll pay more in interest costs over time. A shorter-term funding option might have a slightly higher interest rate than a long-term loan, but the overall costs are lower due to the short repayment period.

Eligibility – If you’re a new business, you could have trouble qualifying for a long-term bank loan. SBA loans are an option for newer businesses, but the loans can take weeks or months to approve and fund.6 Ultimately, you might turn to an online lender for shorter-term options with a faster approval time.

Is a line of credit right for you?

When you get a line of credit, you’re approved for a maximum limit that you can borrow up to. You repay only when you borrow, and as you pay down your balance you can draw from the line of credit again.

A line of credit can work well for seasonal businesses, especially since you don’t have to tap into the funds until you need them. It can be used to grow your business, kick off a new marketing campaign, buy inventory, and manage cash flow.

A line of credit can be secured with collateral, like property or inventory.7 It can also be unsecured, but when there’s no collateral to back it, the interest is usually higher, making it a more expensive option.8

How to choose

A line of credit can be a good, flexible option for a business. But don’t forget to weigh these factors:

Costs – A line of credit will usually have a variable interest rate9, which means your costs will fluctuate. And if the line is unsecured, the interest rate will usually be higher.

Eligibility – You have a better chance of getting approved for a line of credit from a bank if your business is well established, with good finances and good credit. The lender may want you to secure the loan with collateral10, which some businesses might not have or want to offer.11

A mix of funding

At any one time, a business may be using several types of financing – like longer-term loans to cover bigger investments and shorter-term funding or lines of credit to manage cash flow and unexpected expenses. The key is to be clear on what you need funding for, carefully manage how you use the funds, and have a budget in place to repay it.

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