Quick tips: Four differences between a business line of credit and loan
Learn four differences between a business loan and a business line of credit.
1. Access to funds
With a business loan, funds are paid out as a one-time lump sum into your account at closing. With a business line of credit, you can access funds as needed, up to a pre-determined amount, pay down the balance, and reuse the funds again as needed, all without having to reapply.
2. Use of funds
A business loan is a one-time cash infusion for a set amount and usually for a specific purpose such as to purchase a vehicle or to remodel a location. Loans usually have a fixed term from 2 to 6 years or longer depending on the type of loan.
A business line of credit is a revolving credit option in which funds can be used for most business opportunities, such as paying ongoing inventory, payroll, seasonal expenses or unexpected business opportunities.
3. Interest rates
With business loans the interest rate is usually fixed, but variable rate loans also are available. With a business line of credit, the interest rate is variable and is calculated as a margin added to a specific interest rate, such as the Wall Street Journal Prime Rate.
4. Monthly payment schedule
With business loans that have fixed interest rates, the monthly payments are for a set amount, and begin when the loan the funds are paid into your account. These predictable monthly payments are continuous until the loan is paid off. With a line of credit, monthly payments are based on the variable interest rate and the amount you borrow.