Business Line of Credit vs Loan: How To Choose And Which Is Better

Camino Financial09 Jan 2024
Business Line of Credit vs Loan: How To Choose And Which Is Better
Business lines of credit and loans are two of the primary financing options for small businesses. While both options serve a similar purpose —getting you the funds you need— you must know the difference between them before making a final decision that will significantly impact your business. This article will help you determine which one is your best option.
Table of Contents
1. Business loans
2. Business line of credit
3. Differences between lines of credit vs. Business loans
4. Should I get a business loan or a line of credit?
5. FAQs

Business Loans

What Are Business Loans and How do They Work?

Business loans are sums that lenders offer to help finance the operating expenses and investments of entrepreneurs, especially those they can't cover by themselves. When taking out a business loan, the company borrows capital and will eventually pay it back with interest.

Terms and Rates of a Business Loan

They often range from thousands of dollars to upwards of 2 million, though these higher amounts are usually for stable, large businesses with sufficient revenue. Business loans follow unique terms and rates for repayment, typically lasting between one and five years. Business loans' interest rates can be as low as 6% APR and can go as high as 90%+, and you receive your funds quickly. Online lenders often deliver loans within a couple of days.

Requirements Of A Business Loan

Business loans have specific requirements for your company's finances. Once you apply for a business loan, lenders review your application to see if you meet the requirements for credit history, collateral, revenue, and time in business.

Pros and Cons of a Business Loan

The pros of a business loan are as follows.
  • They offer a cash flow boost
  • You have access to large sums of money
  • You can maintain business ownership
Below are the potential cons.
  • Long application process with extensive paperwork
  • Risk of default
  • Less flexibility

How to Get a Business Loan

Once you have determined if a business loan is a suitable option, calculate the funding amount you need and what payments are affordable. Then, decide on collateral for your loan and repayment terms. Once you are sure that a loan is the best option, apply for a loan with the lowest APR and a suitable payment schedule. Follow instructions provided by a lender. Apply for a business loan today

Where to Get a Business Loan

You can turn to different financial institutions and lenders for a business loan. You might consider a bank with which you have a business relationship, a credit union, or online lenders. There's no shortage of options for your business loan.

What Can a Business Loan be Used For?

You can use them for many operations, and the following are some of the best uses.
  • Business expansion
  • Equipment funding
  • Start-up costs
  • Real estate costs
  • Working capital
  • Purchasing inventory
  • Marketing campaigns
  • Offsetting unpaid invoices
  • Hiring employees
  • Payroll and payroll taxes

Business Line Of Credit

What is a Business Line of Credit

A business credit line helps small businesses access capital whenever necessary. A small business line of credit is similar to a typical credit card because it allows you to borrow money whenever you need it, up to a specific credit limit. Over time, your business must pay this money back as you would with a credit card. Lines of credit are helpful for small businesses that need regular access to money. If you take out a line of business credit, you are only required to pay interest for the specific amount of money you borrow.

Line of Credit: Terms and Rates

A line of credit ranges from $1,000 to $500,000. Line of credit rates can be as low as 8% APR up to 24% APY. You will likely pay a higher rate if your business struggles with poor credit. A business line of credit offers funds quickly, and you should receive the funding in one to two weeks with a maturity term of one to two years.

Business Line of Credit Requirements

Lenders typically have a line of credit requirements regarding credit score, time in business, and overall revenue. For instance, you may need a stable personal credit score, six months of being in business, and at least $50,000 in annual revenue. Some business lines of credit require that you have revenue or a personal credit score. Additionally, some businesses might qualify only if they've been in business for at least six months.

Pros and Cons of a Line of Credit

Below are the main pros of choosing a line of credit over a loan.
  • Lines of credit even out cash flow
  • You pay for what you need
  • You can take new business opportunities with greater adaptability
  • A stronger relationship with the lender
  • You build business credit
However, a line of credit has cons, such as the following.
  • Extra fees
  • Challenging qualifications
  • Lower borrowing limits
  • Potential for misusing funds
  • Time-consuming applications

How to Get a Line of Credit

A business line of credit requires a credit application containing your personal and financial information and proof of this information. First, determine how much funding you need from your credit line. Once you determine your eligibility, gather the documentation you'll need for the application. You can submit your application online or in person to lenders per their instructions.

Where to Get a Line of Credit

You can receive a business line of credit through banks, credit unions, or online lenders.

What Can a Line of Credit be Used For?

Below are the primary purposes for a business line of credit to consider when deciding between a credit line and a loan.
  • Emergency funds
  • Marketing campaign funds
  • Payroll or staffing requirements
  • Paying your suppliers
  • Increasing your inventory
  • Repairing and upgrading equipment
  • Cover seasonal lulls in your cash flow
  • Accounts payable
  • Large purchases
  • Additional business expenses
  • Bulk inventory discounts
  • Refinancing and consolidating existing debt
  • Business expansion

Differences Between Lines of Credit vs. Business Loans

Though both products serve the purpose of financing your company, knowing their differences is essential to decide which one to choose. 

Repayment Schedule

A business loan follows a fixed-interest rate repayment schedule where the borrower pays back money in regular installments. A line of credit follows a repayment schedule where the company's current balance and accrued interest are repaid over time, whenever able, before borrowing more. A line of credit doesn't have strict terms about repayments, making it a more flexible option for some companies able to pay interest after withdrawing funds. A small business loan follows a rigid schedule where you have a specific time to pay back the money. When you withdraw a business loan, you will begin making payments immediately.

APR and Fees

Small business loans typically tend to involve higher rates than lines of credit. The annual percentage rate (APR) explains the annual cost of your business loan, including fees and interest rates.


Lines of credit requirements for businesses are less strict than loan requirements because the financing amount is usually lower. However, it's important to note that requirements might vary depending on your choice of lender.

Funding Size

Business loans are usually available in more considerable sums than lines of credit. In some cases, you may discover higher credit limits among the lines of credit lenders.


Lines of credit are more flexible than financing solutions like small business loans because they have more uses. Even the best loans for businesses might not allow you to use funds in every area of your business, and small business loans offer you a set amount of money meant for a specific purpose.


Small business loans require you to reapply if your business needs additional funds. When you apply for a business line of credit funding, you don't have to worry about reapplying in the future to get more capital. As you make payments to your line of credit, you free up capital that you can reuse for other purposes. Apply for a business loan today


Business loans allow you to access the entire amount of funding immediately and require that you repay these funds in full, including interest. Lines of credit offer access to specific amounts of money you can withdraw and repay with interest. A small business loan is typically larger than lines of credit, ranging from a few hundred dollars to millions. In contrast, lines of credit typically max out around $500,000 for larger companies and much less for small businesses.

Loan Purpose

Business loans are for specific business purposes instead of general expenses. Business lines of credit lets you use the funding on any business-related venture or emergency. For instance, business loans you receive to purchase necessary equipment only serve that specific purpose. You cannot take the money from a business loan and use it for other purposes like onboarding and paying employees.


Both financial products may require collateral, depending on the lender and your credit profile.  For instance, you may have to put inventory, accounts receivable, or other business assets as collateral when taking out a loan or a business line of credit.

Should I Get a Business Loan Or a Line Of Credit?

Ultimately, your answer boils down to the type of financing best for your business according to your needs and eligibility. Traditionally, businesses take out bank loans if they already have collateral to offer and are established as a company. SBA loans are a valuable option if you run a small business. Depending on your eligibility and qualifications, SBA or Small Business Administration interest rate loans could help your business get a head start. Additionally, depending on your business credit score, you might consider online lenders to help finance your business operations. There are a few things to consider when deciding whether to get a business loan or line of credit:
  • How long do you anticipate needing the loan or line of credit?
  • What is your credit score?
  • What is the interest rate on the loan or line of credit?
  • Are you comfortable with making monthly payments?
  • How much money do you need?
  • What is your company's annual revenue?
  • What is your company's profit margin?
  • What is the length of time you've been in business?
Based on these factors, you can then decide which option would be best for your business!

Get the Financing You Need

Whether looking for business financing, you can apply for a Camino Financial microloan. Here are some of our highlights:
  • You can get from $5,100 to $25,000
  • No collateral
  • Your business must be registered (reflecting at least 12 months since registration)
  • If you don't have an SSN, you can apply with your ITIN number.
Apply for a business loan today


What is a Business Loan?

A business loan is a sum of money borrowed by a business to use it to finance its operations. The money can be used for various purposes, such as purchasing inventory, hiring new employees, or upgrading equipment.

Should I get a small business loan?

It depends on the business and the loan. Small business loans can be a great way to get the financing you need to start or grow your business. However, it's important to research before applying for a loan, as not all loans are equal.

Why would a business choose to use a line of credit rather than obtain a loan and receive all the money at that time?

Using a line of credit can be less paperwork-intensive and time-consuming than obtaining a loan and can help businesses keep their cash flow more consistent since they won't have to wait for the entire loan amount to be disbursed. Using a line of credit can be less expensive than getting a loan, particularly if the interest rate on the line of credit is lower than the interest rate on loan.

Is a line of credit a good idea for a small business?

There is no one-size-fits-all answer to this question, as the decision of whether or not to get a line of credit depends on a variety of factors specific to each small business. However, a line of credit can be a valuable tool for small businesses that need short-term financing.

Is a small business line of credit a business loan?

Yes. A small business line of credit is a type of business loan that provides a revolving credit line to help your business manage its cash flow. It's a great option if you need access to capital quickly and doesn't want to go through the hassle of applying for a loan each time you need money.

How long is a business loan?

It depends on the type of loan. The most common types are short-term loans (usually up to one year) and long-term loans (usually over five years). However, there are also variable-length loans and lines of credit.

How to qualify for a business line of credit?

To qualify for a business line of credit, your business will need to meet certain requirements, such as having been in operation for at least two years and having a good credit history. You'll also need to provide information about your company's cash flow, debtors, and creditors.

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