Keeping a small business afloat often hinges on managing cash flow effectively. Unexpected expenses, seasonal dips in sales, or the need for a major investment can all disrupt your financial rhythm. Fortunately, several financing options exist to help bridge these gaps and propel your business forward. 

Two of the most common choices are business term loans and business lines of credit. But which one is right for you? While these two financing options are accessible and advantageous for small business owners, understanding the differences between them can help you make a choice that both addresses your current financial need and helps you establish long-term financial stability. 

What is a Business Term Loan?

A business term loan is a one-time lump sum payment you receive from a lender. This loan comes with a fixed repayment schedule and interest rate. The loan term, which is the total length of time you have to repay the loan, is also determined at the outset. In essence, you borrow a specific amount of money upfront and agree to pay it back, with interest, in fixed installments, over a set period.

Here are some key characteristics of business term loans:

  • Lump sum payment: You receive the entire loan amount at once.
  • Fixed repayment schedule: You make regular payments over the loan term.
  • Interest rate: The interest rate is fixed for the entire loan term.
  • Loan terms: Loan terms vary depending on the lender and business qualifications.

Business term loans are a good option for financing specific needs that require a larger sum of money upfront. Common uses for business term loans include purchasing equipment or machinery, financing real estate acquisition or renovations, and funding business expansion or growth initiatives.

What is a Business Line of Credit? 

In contrast to a business term loan, a business line of credit functions more like a revolving credit card for your business. It provides you with a pre-approved spending limit, similar to a credit card, that you can tap into as needed. You only pay interest on the amount of money you actually borrow from the line of credit.

Here’s a breakdown of the key characteristics of a business line of credit:

  • Revolving credit line: You can access funds up to a certain limit and draw repeatedly.
  • Interest charged on used amount: Interest is only accrued on credit you utilize.
  • Minimum payments: You’ll make minimum monthly payments on the balance.

Business lines of credit are a good option for covering ongoing or unexpected business expenses. They provide flexibility to manage cash flow fluctuations and emergencies such as covering operational costs during slow sales periods, financing unexpected expenses like repairs or inventory shortages, or bridging the gap between receivables and payables.

What is the Difference Between a Business Line of Credit and a Loan?

Deciding between a business line of credit and a loan can be a crucial step for your company’s growth. While both offer financial resources, they function in fundamentally different ways. Here’s a helpful breakdown:

Business Term LoanBusiness Line of Credit
FundingLump sum paymentRevolving credit line
RepaymentFixed installmentsMinimum payments on the balance
InterestFixed interest rate for the entire termInterest only on used amount
FundingLump sum paymentRevolving credit line

A business term loan provides a lump sum of cash upfront that you repay with interest over a fixed term. This predictability makes budgeting easier and is ideal for singular expenses like equipment or property acquisition.

In contrast, a business line of credit acts more like a revolving credit card. It gives you access to a pre-approved pool of funds that you can tap into as needed. You only pay interest on the amount you borrow, offering more flexibility for ongoing costs or emergencies.

Ultimately, the best choice depends on whether you need a one-time injection of capital or ongoing access to funds for your business.

Which is Better: Small Business Loan or Line of Credit?

Still trying to decide between a business line of credit vs. loan? Considering a few important variables can help point you in the right direction. Here are the key factors to consider:

  • Amount of Funding Needed: Business term loans are ideal for situations where you require a larger sum of money upfront, like for equipment purchases or property acquisition. Lines of credit, on the other hand, are better suited for ongoing or fluctuating expenses where you might not need the entire credit limit at once.
  • Purpose of Funds: Term loans are best for specific, one-time expenses with a clear purpose. Lines of credit offer more flexibility and are suitable for ongoing operational needs, seasonal fluctuations, or unexpected emergencies.
  • Repayment Flexibility Needs: Business term loans offer predictable repayment schedules, making budgeting easier. However, you’re obligated to repay the full amount even if you don’t use all the funds. Lines of credit provide more flexibility to access funds as needed, but you only pay interest on the used amount.

Choosing the right option depends on your circumstances. If you need a predictable repayment plan for a large purchase, a term loan might be the way to go. However, if you need ongoing access to funds for operational costs or emergencies, a line of credit might be a better fit.

What About an SBA Loan vs. Line of Credit?

The Small Business Administration (SBA) offers various loan programs specifically designed to support small businesses. These government-backed loans can be structured as either term loans or lines of credit. Here’s a quick look at how SBA loans differ from traditional business loans:

  • Eligibility requirements: SBA loans often have stricter eligibility requirements compared to regular business loans. These may include factors like business history, credit score, and industry type.
  • Interest rates: SBA loans typically offer lower interest rates due to the government guarantee. This can make them a more attractive option for qualified businesses.
  • Loan terms: SBA loan terms can vary depending on the specific program, but they often offer longer repayment periods compared to traditional term loans.

It’s important to note that not all businesses qualify for SBA loans. However, for those who do, they can be a valuable source of financing with lower interest rates and more favorable terms. Be sure to research different SBA loan programs available to see if any align with your business.

Choose the Financing Option That Fits Your Business

Navigating business financing can seem complex, but understanding the key differences between business term loans and lines of credit empowers you to make informed decisions. Carefully consider your funding needs, repayment flexibility requirements, and the purpose of the funds to choose the option that best fuels your business growth.

Whether you choose a business line of credit vs. loan, NorthOne is ready to help you get the financing you need to run your business successfully. Business account holders can apply in as little as two minutes for financing up to $250k! Best of all, applying won’t impact your credit score! Don’t fret over financing: apply for a business term loan or line of credit today. 

Frequently Asked Questions (FAQs)

Still trying to decide between a business term loan and a business line of credit? Here are a few of the most frequently asked questions and their answers for small business owners.

Is it easier to get business credit or business loan?

In general, it is often easier to get approved for a business line of credit compared to a business loan. Lines of credit typically have less stringent requirements and offer lower borrowing amounts.

When should a business use a line of credit?

A business line of credit is a good option for situations where cash flow fluctuates or unexpected expenses arise. They’re also ideal for businesses that need ongoing access to capital for operational costs, like inventory or payroll.