A simple guide on small business loan vs line of credit

Small business loans are similar to personal loans, but only for business purposes. It's a lump sum of money that your lenders are willing to lend you. ​

Repayments and interest are part of the repayment schedule for small business loans. The total repayment amount is broken down into smaller repayments which are usually due on a regular basis (e.g., weekly, monthly). In essence, you have to pay the interest in addition to the amount borrowed throughout the loan term. Small business loan interest rates sometimes can vary, some lenders tailor their interest rates based on the business’s circumstances. ​

Like credit cards, a business line of credit works similarly. It means you can borrow money up to a credit limit and repay it over time. Once you’re approved to access a line of credit, you’ll be able to withdraw funds whenever it’s needed. Also, you only pay interest on the money you withdraw, not on the total amount of the credit limit. ​

For example, if you have a £10,000 line of credit, you could withdraw £2,000 for purchasing equipment for your business. You’ll only need to pay the interest on that £2,000, at the same time, you still can use the remaining £8,000. ​

Now you’ve learnt the differences between a small business loan and a business line of credit, you may want to decide what works the best for you. ​

Here are some key questions to ask yourself before making your decision: ​

With these questions in mind, there are a few factors you should take into consideration when choosing a small business loan or line of credit. ​

Small business loans generally offer a longer borrowing period than business lines of credit. If you need to purchase expensive business assets or equipment, it’s likely that a small business loan is better than a line of credit. However, if you need to match income to expenses, especially when expenses and income have yet to catch up to pay for employees’ salary or rent, a line of credit could be your choice. It’s worth noting that a business line of credit is typically smaller than a small business loan. ​

A major difference between a small business loan and a business line of credit is that some lines of credit are revolving. The funds from the line of credit can be used up to your approved limit and repaid without having to reapply. A small business loan, on the other hand, is a lump sum you can borrow and repay once, with interest. If you run out of the borrowed money in your small business loan, you'll need to apply again. ​

In general, small business loans are best used for specific projects while lines of credit are more like business credit cards so you can use it when you need it.​

You can apply for a business loan if you want a predictable payment schedule. The business line of credit can be a good option if you have consistent cash flow and are willing to pay relative to the amount borrowed. ​

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