Line of Credit vs. Loan: What Are the Differences?
Are you confused about the difference between a line of credit and a loan? Be assured that you aren’t alone! Often, these terms are used synonymously or interchangeably. However, they are distinct funding products, and understanding the differences will help you clearly determine which – if either – is right for your business. The key areas where they differ are: usage, repayment, spending horizon, rate sensitivity, closing costs and application.
Line of Credit vs. Loan: Usage
A line of credit can be used multiple times, depending on when you need funding. You get pre-approved for a certain amount of money and you can request funds up to that limit when you need them.
A loan on the other hand is one sum of money that is applied for at one specific time. Then that sum is money is lent to a business all at once (although the funds can be allocated to expenses/investments across several months or years).
Line of Credit vs. Loan: Repayment
A line of credit is paid back based on the amount borrowed – which means that if no funds have been borrowed (or previously-borrowed funds have been paid back and there is no draw on the line of credit), there are no payments due.
A loan is typically paid back in fixed monthly amounts or daily amounts depending on the loan type. Often times, repayment schedules can be made according to the business model. For example, if a business processes credit card payments daily, it may be more suitable for daily repayment.
Line of Credit vs. Loan: Spending Horizon
A line of credit is typically used to address short-term working capital needs, such as covering unexpected and temporary payroll shortfalls, taking care of emergency equipment, or building repairs.
A loan is typically for a long-term investment, such as expanding into new markets, major renovations, and so on.
Line of Credit vs. Loan: Interest Rate Sensitivity
Lines of credit are typically not sensitive to interest rate changes as you only pay for what you use.
Whereas loans are typically more sensitive to interest rate changes (e.g. variable rates).
Line of Credit vs. Loan: Application
A line of credit is applied for before any or all of the funds area needed, since the idea is to have cash immediately available when required. Essentially, you are approved to receive funding during a specific time period if you need money in the near future.
A loan is applied for when there is a clear need and purpose for the funds. The application process for both a loan and a line of credit depends on where you are getting the loan from. Banks often take six months or longer to approve a loan application whereas alternative lenders can often get approval within 24 hours. The requirements also differ based on your lender. Banks are more likely to fund a loan with perfect credit, collateral and positive financial history, but sometimes even this isn’t enough.
At National Business Capital, we know that choosing the right funding product is essential for your business, your bottom-line and your peace of mind. We invite you to contact us and speak with our experienced team to learn more about your options. If you choose to make us a partner in your business’s success, be assured that our application process is rapid and streamlined, and we offer flexible repayment options that are tailored to your specific needs and cash flow profile.