When it comes to funding your business, there are multiple ways to do so. Availing a business loan or a business line of credit are two ways of financing your business. Both these credit facilities provide you funds which can be used for expanding your business, meeting the daily working capital requirements or for any other purposes. Though both these facilities allow you a source of finance, they are quite different from each other. Do you know how? Let’s understand –
What is a business loan?
A business loan is a term loan which is offered for a fixed period. You get the loan in a lump sum and then repay the loan through fixed monthly installments.
What is a business line of credit?
A business line of credit is like a credit facility which is allowed to you. You are allowed a pre-defined credit limit and you can withdraw funds up to the specified credit limit.
Difference between the two
- Nature of the loan
Business loans are traditional loans wherein you get the funds at once and then repay the loan in monthly payments. Line of credit, on the contrary, is like a credit card for your business. You get a credit limit and you can draw funds up to that limit whenever you want.
Business loans have a higher interest than lines of credit. It is because of the fact that in case of business loans interest is payable on the entire value of the loan. However, in a business line of credit, interest is charged only on the amount that you withdraw.
- Amount of loan
You get a higher amount of loan through business loans than through lines of credit.
Business loans are repayable through fixed EMIs every month. In line of credit, facility repayment is required only when you utilise the credit allowed.
Business loans come with a term of up to 5 years. Lines of credit, however, don’t come for such long-term perspectives. They are, usually, renewable every one or two years.
- Usage of the loan
Both business loans and lines of credit can be used for any type of business requirement. However, business loans are useful for long-term needs of the business. Lines of credit are meant for more short-term requirements which are urgent in nature.
- Availability of the loan
A business loan is available only if you are in need of funds. To avail the loan, you would have to submit a detailed business proposal indicating the purpose for which the loan would be used. A line of credit is a pre-approved credit facility. You can avail of a line of credit even when you don’t require it. Later on, when the requirement arises, the credit allowed in a line of credit can be used.
So, while business loans are long-term loans which can be used for capital needs of the business, a line of credit is a short-term credit facility which can be used flexibly for meeting the short-term financial requirements of the business. Lenders allow both these forms of credit and you should choose one based on your actual financial requirements.