A small business loan and a line of credit are two different types of ways to raise funds for the business expansion, upgrading, or starting a business. But for your small business to qualify for both line of credit and small business loan, you need some requirements to be met. The business needs to have a good credit score and business operation for a medium to long-term in order to stand a chance of success. Other than that, both the methods are different and are suitable as per different purposes of the business.
Requirements to Qualify
The loan amount does not become the only factor in order to for approval or rejection. There are several other factors that are considered before approving the additional financing such as knowledge of the industry, business plan, and the purpose of the loan.
In case of line of credit, the importance of a good credit score is much more important. Without that, many businesses won’t qualify for it. In addition, the length of time that the business has been established and the type of industry is also considered. According to the nature of the business, they are categorized as risky or if they are unstable.
Number of Times Used
Small business loans are provided only when it is required for a specific purpose. But the line of credit can be set up in advance and can be used for multiple purposes. Additionally, it requires a slightly longer time to acquire line of credit, while small business loans can see the funds in your bank account within 24 to 48 hours.
Small business loans allow you to pay consistently from month to month and the payments would remain the same till the end. This is possible due to the fixed interest rate. In case of line of credit, the payment is done according to the money that has been drawn and hence the payment and the interest rate both will fluctuate.
Small business loans are much more predictable than a line of credit. The payments in small business loans go towards the interest and principle, while in line of credit, the payment is controlled by you and the money you have drawn.
Rate of Interest
While the small business loans are supposed to have higher interest rates, they are fixed normally and are based on the total amount of the business loan. The Lines of credit provides lower rates comparatively but it varies and depends on the amount of money you are drawing. This means that if there is any late payment or the credit line is crossed then the interest rates will rise.
Types of Financing
As we know that the small business loans have fixed rate of interest, provision for a higher loan amount, and much longer repayment terms, it would be a better option for the long-term financing projects. While line of credit makes it comparatively easy to get the required funds with lower interest rates which would be great for short-term financing areas such as repair, marketing or adding inventory.