When you need money to build, start or grow your own business, you have to know the difference between a business loan and line of credit. Each one of them has its unique purposes that could give your business a boost, but by understanding the differences, you will be able to make the right decision. Of course, there are advantages and disadvantages in both of them, and your decision depends on what is best for your company and what are you trying to achieve.
First off, you have to understand that interest rate for the business loan is different than the line of credit. If you choose a business loan, you will get fixed interest rate, while a business line of credit has a variable rate which is tied to the prime interest rate. That means that your interest rate could fluctuate 2% over prime rate. The interest rate will adjust only once a month. Here is a video to help explain the interest rates.
With a business loan, you will be able to schedule a number of payments with a payment amount because the interest rate is fixed, so you will know the exact amount you have to pay at the very beginning. You have the possibility to make the payments on the monthly, quarterly, or annual basis.
For a business line of credit, the amount is changing on a monthly basis so you have to make payment on those conditions. Also, payments are based on the amount that you agreed with the bank in the previous 30 days.
The business loan becomes active when all the loan documents are signed, and once they are issued and you get paid you will not receive any additional arrangements from the loan.
A business line of credit is functioning like a credit card, so for example, if you have $30,000 in the line of credit, you can draw and spend on the line of credit as long as you have that amount.
Business loans have numerous different terms that are depending on the amount and previously signed agreement. They cannot be longer than five years.
The line of credit may last for 10 years, but the bank has the power to call off and cancel the line of credit and to demand the business to pay everything in advance.
When you are using business loan in order to close the loan you have to pay a processing fee, appraisal fee for any collateral and credit fee. For business line of credit, you will be charged with processing fees. The bank could, for example, charge you $50 for every transaction and because of that lines of credit are more profitable for banks than businesses.
These are the main differences between business loan and line of credit and you should be informed of them if you have a small business or you want to improve it by taking loan or credit. It all depends on your line of work, achievement goals and amount that you are willing to get and to pay afterward.