When financing a business, choosing between a business loan and a business line of credit can significantly impact your cash flow, repayment flexibility, and overall costs. Both options provide businesses with capital, but they serve different purposes. A business loan is best for large, one-time expenses, while a business line of credit offers ongoing financial flexibility.

This guide breaks down the differences, pros, cons, and ideal use cases for each option to help you make the best financial decision for your business.

Key Differences Between a Business Loan & Business Line of Credit

A business loan provides a lump sum of money upfront, which must be repaid in fixed installments over a set period. It is best suited for large, one-time expenses such as equipment purchases or expansion projects. Repayment terms are fixed, and interest applies to the full loan amount, with rates typically ranging from 5% to 30%. Loan amounts range from $5,000 to $5 million, and approval can take anywhere from one week to three months.

A business line of credit, on the other hand, is a revolving credit account that allows businesses to borrow as needed up to a set limit. It is ideal for managing cash flow, short-term expenses, or covering unexpected costs. Repayment is flexible, and interest is only charged on the amount borrowed. APRs typically range from 7% to 25%. Credit limits range from $10,000 to $500,000, with approvals taking between 24 hours and two weeks.

If you need one-time funding, a business loan is better. If you need ongoing access to capital, a line of credit is ideal.

What is a Business Loan?

A business loan is a lump-sum loan that must be repaid over a fixed term with interest. It is best for large purchases, long-term investments, or business expansion. Since monthly payments remain fixed, it provides predictable budgeting. Interest rates are typically lower, starting at 5% for well-qualified borrowers.

Common types of business loans include term loans, which provide a set amount repaid over a fixed period, SBA loans, which are government-backed and offer low rates, and equipment loans, which finance the purchase of business machinery or vehicles.

For example, a construction company needing $100,000 to buy machinery may take out a 5-year term loan at 8% APR, making fixed monthly payments.

What is a Business Line of Credit?

A business line of credit (LOC) is a revolving credit account that allows businesses to withdraw funds as needed, up to a predetermined limit. It is best for managing cash flow, short-term expenses, or handling emergency costs. Unlike a loan, businesses only pay interest on the amount borrowed, not the full credit limit. However, APRs tend to be higher, typically between 7% and 25%.

For example, a retail business with a $50,000 line of credit may withdraw $10,000 for inventory purchases and only pay interest on that amount, rather than the entire credit limit.

Pros & Cons of Business Loans vs. Lines of Credit

Business loans offer predictable fixed payments, lower interest rates, and help build business credit. However, they are less flexible since funds are received in one lump sum, may require collateral for larger amounts, and often take longer to approve.

A business line of credit provides flexible borrowing, faster approval times, and no interest charges unless funds are used. However, it typically has higher interest rates, requires strong credit for the best terms, and lenders may reduce the credit limit unexpectedly.

How to Choose: Business Loan vs. Line of Credit

A business loan is best if you need funding for a large, one-time expense, prefer fixed monthly payments, and want lower interest rates. For example, buying a $250,000 warehouse would require a business loan with a 10-year repayment term.

A business line of credit is better for businesses needing flexible funding for short-term expenses, wanting to avoid interest on unused funds, or managing seasonal cash flow fluctuations. For example, a restaurant using a $30,000 line of credit to stock inventory before the holiday season benefits from this option.

Best Business Loan & Line of Credit Lenders (2024)

Lendio offers business loans ranging from $5,000 to $5 million, with APRs between 6% and 30%, making it a great loan marketplace option. BlueVine provides business lines of credit up to $250,000, with APRs ranging from 15% to 68%, offering fast approvals. SmartBiz specializes in SBA loans up to $350,000, with rates between 7% and 10%. Fundbox provides short-term funding with lines of credit up to $150,000 and APRs between 10% and 79%.

Comparing lenders before applying ensures you get the best interest rates and terms.

How to Qualify for a Business Loan or Line of Credit

To qualify for a business loan, most lenders require a credit score of 650 or higher, at least two years in business, and a minimum annual revenue of $100,000. Some loans may require collateral.

For a business line of credit, higher credit scores of 680+ improve approval chances. Many lenders accept businesses that have been operating for six months to two years, with a minimum annual revenue of $50,000. Most lines of credit do not require collateral.

If your credit score is below 650, consider improving it before applying to secure better rates and terms.

Final Decision: Which Loan Option is Right for You?

Choose a business loan if you need long-term funding for a big project. Choose a business line of credit if you need ongoing financial flexibility.

By understanding your business goals, cash flow needs, and repayment preferences, you can select the best financing option to grow your business successfully.

Frequently Asked Questions (FAQs)

Can I have both a business loan and a business line of credit? Yes! Many businesses use both for different financial needs.

Which is easier to qualify for? Lines of credit require a stronger credit score, but business loans require more paperwork.

Do I need collateral for either option? Some business loans require collateral, while most lines of credit are unsecured.