Three Parameters To Decide Between Line Of Credit And Small Business Loan

Different types of small businesses come across different types of financing needs. Some might need funds at the starting stage itself while other would need funds to meet working capital demand or running operations.

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Similar to varying needs of financing for each business, a loan or financing option also varies according to the type or need of the business. A small business entrepreneur should responsibly evaluate the various options and decide as which course of funding is appropriate for the business.

Here is a comparison made between Line of Credit and Loan on various parameters to help sort out information for the small business owners.

  1. Loan Amount – Under a line of credit, a business can seek flexible credit, however, set limit can only change after the completion of 12 months. Thus, a business can decide how much money to borrow in one year, which can change the next year. Conversely, a business loan is fixed, while the repayment schedule kicks in immediately and is spread over the fixed number of years.
  2. Loan Term – In the line of credit, business has no compulsion to use it without the real need. This means that the business can use the approved line of credit as and when needed, and the repayment cycle starts once the line of credit is used. However, a business loan disburses the fixed amount right after the approval, and the repayment will start even if the business has used the funds or not.
  3. Stability of Credit – Line of Credit has one shortcoming as the decision to fix the limit rests with the bank. This implies that the bank has the power to reduce the line of credit or revoke it anytime following the annual review. Thus, depending solely on the line of credit could prove to be risky for business entrepreneurs. On the other hand, an approved business loan is not prone to such ad hoc changes and the funds once disbursed will stay with the business.
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