If you need money to expand your company, increase cash flow, or add to working capital, there are several financial solutions available. The two most typical options are a business loan and a business line of credit. Here we examine each one so you can make the most appropriate financial decision for you and your company’s circumstances.

How does a business loan work?

A business loan is a one-time payment that you get on the first day of the loan term. It has a repayment schedule, and there can be limitations on whether the entire amount can be repaid early. Throughout the loan’s term, you will generally have to pay interest on the outstanding balance, however, each lender may apply their terms and conditions to business loans.  Most business loans have higher borrowing limits than lines of credit, and some don’t require security. Due to the risk, extremely large business loans might need collateral to be held against the loan.

What can a business loan be used for?

Large purchases like business equipment can be financed with the help of business loans since they are usually available for higher sums than a business line of credit. This can also be a smart way to spread out a substantial one-time cost that must be paid in full, such as an office makeover or shop fit out. A business loan can be used for startup costs, capital expenditures, business acquisition, marketing initiatives, buying new or used equipment, beginning a franchise, buying commercial vehicles, technological improvements, and repaying other debt.

How does a business line of credit work?

Instead of being paid off in one single payment, a company line of credit provides a continuous source of finance that can be used again as it is returned. Once your application for a line of credit has been authorised, you can use any or all of the available money during the facility’s duration, which is typically 24 months. 

For as long as you utilise the money, you only pay interest on the amount you have used. For example, if you had a $20,000 line of credit, you may withdraw $10,000 one week and pay it back the following week; just the money you’ve accessed will be charged interest until it’s returned. It functions somewhat similarly to a credit card but may have cheaper interest rates. If your cash flow is unpredictable, it can be a helpful safeguard. Borrowers are usually not required to put up collateral when taking out a line of credit because it is typically, though not always, an unsecured form of debt.

What can a business line of credit be used for?

A business line of credit could be useful for controlling cash flow volatility. When business is slow during the off-season but you still need to pay your employees on time or if you expect a client payment delay, for instance, it might be helpful. It can also be used as a short term top up to working capital to help you take advantage of an opportunity, such as a good price on a bulk purchase of merchandise, or to pay for extra personnel during a busy time, rent for a pop up location, a trial lease for a co-working space, or equipment repairs.

So, which one is better?  It mainly depends on your current business and financial circumstances, your risk aversion, and your financial appetite for repaying the loan or line of credit. If you’re in a position where you can pay repayments and interest, then a business loan may better suit your circumstances.  If you need credit for new opportunities, expansion, or cash flow help, a business line of credit may be the better option. Still need credit assistance? Schedule an obligation free call with Micah Finance Solutions to determine the best course of credit action for your business.