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Difference between business line of credit and loan

Do you fear going bankrupt or losing your crucial assets due to a lack of business activities? Is the ongoing lockdown taking a severe toll on your organization? Well, you are not alone. There are hundreds of thousands of organizations that are worried about their survival. To escape this situation, borrowing a loan will be a great option.

DIFFERENCE BETWEEN BUSINESS LINE OF CREDIT AND LOAN

However, several types of loans might make it challenging to make a sound decision, mainly if you have never acquired finances before. But you needn’t worry because we are about to simplify it for you. One of the questions that arise regarding loans is, whether there is a difference between the Business Line of Credit and a simple Business Loan. The second important thing to ask is which one of these best suits a venture’s needs.

In this article, we will walk you through all the essential differences between the two, thus enabling you to make an informed and appropriate decision. So let’s dive right into it.

1.   Loan Amount

Perhaps the primary difference between the two types mentioned above is the amount one can borrow. With a business loan, you can qualify for an amount of $1,000 to $500,000. While for the business line of credit, this amount can go up to as much as $5,000,000. So, if you have a relatively smaller venture, you might want to go for the former option. But if you have been planning an expansion or large equipment, then you should consider the latter. There’re some more details to help distinguish the business line of credit vs. loan, so let’s find out about them in the next steps.

2.   Interest Rates and Repayment

In terms of interest rates, business loans start with a relatively lower amount, making things easier. It may generally vary between four percent to around 25 percent. Conversely, the interest rate for the business loan starts from eight percent.  Another significant advantage with it is that its rate remains fixed, while in case of a line of credit, you could face a penalty in the form of a higher price if you miss a repayment deadline. With a business loan, the repayment time frame can range from one year to 25 years, but in the other case, it could go up to two years.

3.   Borrowing Terms

The business loan has a significant downside in terms of how much money you can borrow, as you only get a lump sum amount. However, in the case of a business line of credit, you have a pool of finances. Also, the interest rate on the former is to be paid on the full amount of borrowing. Whereas with the latter, it is due on only the amount that you will use. In other words, if you have borrowed a business loan, you need to maintain consistency in the payments no matter how convenient or flexible your repayment schedule is.

4.   Purposes of Borrowing

The type of loan you should burrow highly depends on your business needs and requirements. If you have a consistent cash-flow and there is no dearth of capital whatsoever, then there is no harm in opting for the business loan. You can think of it as more like a one-off payment. However, if you have a business that will require continued borrowing and large chunks of money, then the line of credit is probably your best bet. In simpler words, the line of credit works like a safety net to fulfil more binding agreements.

If you have launched a new small venture and you are striving to gain some ground, it may be challenging to pay regularly according to a specific schedule. It can be challenging to repay a tranche when, for instance, you have just sold a piece of equipment but haven’t gotten the payment from the vendor yet. Once your business sees prosperity and starts to generate some revenue, you may think about its expansion to other markets and regions. That’s when you would decide to invest in the business line of credit.

5.   Assets to Collateralize

In the case of the collateral, there is not much difference between the types above of loans. Both categories will require you to collateralize your home, equipment, vehicle, real estate, inventory, or a bank account. But the line of credit might offer some convenience if the circumstances remain in your favor. That means if you are lucky enough to find a suitable lender in a somewhat troubling situation, they may allow you not to collateralize any of your assets. When you get stuck in a challenging and unexpected financial condition, then you may have no choice but to compromise on your precious assets, so finding the best lender is significant.

In general, to avoid any defaults, it is best to make all payments on time. It is true, particularly in case of a business loan. If you have decided to prefer it over the line of credit, remember to borrow cautiously and economically. If you still think that you must acquire a large amount, then you may abide by the repayment schedule to rule out risks. Think about it this way, you can never imagine losing your property or other assets regardless of the circumstances, then why risk them at all?

Conclusion

Any business may decide at any point that they require adequate capital to keep the operations running. Situations like the COVID-19 outbreak require that you make some crucial decisions. By doing so, you won’t have to shut your venture or consider layoffs. The only question is how you would make the right choice. While the stakes are high in case of the line of credit, repayment terms are more accessible. With the business loan, you will need to have a comprehensive plan to avert a default. Either way, don’t delay your decision as it will only make matters worse and put your investments in jeopardy. The current circumstances call for a wise and timely resolution. So, act smart.

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