Small Business Loan vs. Line of Credit

Small Business Loan vs. Line of Credit

While a small business loan and a line of credit (LOC) can provide your business with working capital to help it grow and offset small business expenses, they operate differently and ultimately fulfill different business needs.

Although, approval for both loans and LOCs is dependent on specific criteria such as credit score, time in business, and financial history.

What is a Small Business Loan?

 A small business loan is a financing option that provides companies with a lump sum of upfront working capital with set payment amounts and dates. Once approved for a small business loan, the funds will be deposited into a business bank account for immediate use. 

Small business loans are ideal for expansion/renovation plans, gaps in cash flow, purchasing equipment, and so much more!

Pros

• Fixed Payments
• Higher loan amounts
• Predictable payment schedule
• Funding is fast (if you use an online lender)

Cons

• May require collateral
• Potentially higher costs
• Stricter eligibility requirements

Small Business Loans at Rapid Finance

Small business loans through Rapid Finance are fast, flexible, and simple to apply. When approved through Rapid Finance, your business can expect funds to be deposited into your business bank account within hours of approval.

Below we’ve created a breakdown of the terms, benefits, fees, and more associated with a small business loan at Rapid Finance.

• Fixed Payments
  • Automatic fixed daily, weekly, or monthly payments
• Loan Amount
  • Starts at $5,001, up to $1 million
• Term Options
  • Terms start at three months and range up to sixty months
• Cost & Fees
  • An interest or fixed fee will be charged; other fees may also be included.

How to Apply for a Small Business Loan at Rapid Finance

If your business is considering applying for a small business loan with Rapid Finance, these are several things to know.

You’ll need three key documents to apply.

1. A valid form of identification
2. Business bank account number and routing
3. Last three months of business bank statements

Our application can be completed online.

Visit our online portal – Fill out an application. Tell us about your company, goals, and objectives. We recommend having the necessary paperwork on hand to make the process faster.

Review – Our team will carefully review your business financing application, and one of our trusted business advisors will reach out if we need any additional information.

Get Funded – If approved, our team will send your business funds to the business bank account provided. This can be as quick as a few minutes, so be on the lookout!

What is a Small Business Line of Credit

A small business line of credit is a flexible funding tool that allows businesses to borrow a fixed amount of funds they can draw on when necessary while only paying interest or fees on the amount they use.

Business lines of credit allow your business to take out working capital when needed without taking it all at once, making it a valuable tool for small businesses to overcome gaps in cash flow and help grow their company.

A business line of credit can be an excellent option for businesses that require flexible access to fast financing for short-term expenses to help manage day-today-requirements, replenish inventory, build a cushion, or cover unexpected costs.

Here are the pros and cons of opening a business line of credit.

Pros

• Can even out cash flow
• Easy application process
• Flexible financing option
• Could help build business credit
• Revolving access to working capital

Cons

• Lower borrowing limits
• Stricter requirements to qualify
• Potentially lower maximum credit limits
• Fees may be assessed on each draw
• Potentially shorter repayment terms

Small Business Lines of Credit at Rapid Finance

Rapid Finance’s line of credit is flexible and gives your business access to the working capital it needs when it needs it most.

Below we’ve created a breakdown of the terms, benefits, fees, and more associated with a LOC at Rapid Finance.

• Flexible Payments
  • Payments are automatically withdrawn from the business bank account 
• Available Funds
  • Credit limits start at $5,001, up to $55,000
• Term Options
  • Amortization from 3–18 months (the term may reset every time you draw capital)
• Payment Frequency
  • Fixed weekly payments are withdrawn from the business bank account on file
• Cost & Fees
  • An interest charge or fixed fee will be charged, other fees may also be charged.

How to Apply for a Line of Credit at Rapid Finance

If your business chooses to apply for a small business line of credit with Rapid Finance, it should be noted that we have a simple, fast, and trusted application process.

Documents You’ll Need to Apply

1. A valid form of identification
2. Business bank account number and routing
3. Last three months of business bank statements

Application Process

Apply Online – Visit our online portal to fill out an application. Tell us about your company, goals, and objectives. We recommend having the necessary paperwork on hand to make the process faster.

Review – Our team will carefully review your business financing application, and one of our trusted business advisors will reach out if we need any additional information.

Get Funded – Our team will send the previously selected initial draw to your business bank account if approved.

Obtain Additional Funds – Because lines of credit are revolving, your business can come back and draw on your business’s line of credit up to the approved amount while your line of credit is still open.

Small Business Loan vs. Line of Credit: The Difference

While both lines of credit and short-term loans provide access to working capital that helps offset small businesses’ expenses, they operate differently and serve different business needs.

Small Business Loan

In general, small business loans are better for financing specific projects or one-off expenses like

purchasing inventory or opening a new location.

This is because your business is receiving one fixed lump sum of working capital that it will have to pay back over a predetermined length of time. Your business can only access the loan amount once it can’t be used again after it’s paid off.

Line of Credit

On the other hand, lines of credit are better suited for ongoing operating expenses or creating an emergency fund.

Lines of credit work on a revolving basis, meaning your business can draw on funds up to the maximum approved credit amount while only repaying the funds it uses, plus interest. Unlike loans, your business has continuous and repeated access to these funds, making them beneficial to tap into working capital on an as-needed basis.

Below we’ve highlighted the main similarities and differences between small business loans and lines of credit.

Similarities

• Flexible Capital
• Short-Term Options
• Lenders – both are offered through traditional banks and alternative lenders.

Differences

• Uses
• Fees
• Requirements
• Repayment Structure

Small Business Loan vs. Line of Credit: Which Works Best for You?

Now it’s time to determine how to choose which small business financing option is best for your business. Choosing the best option will depend on how much financing your business requires and your exact business needs.

Here are some determining factors to keep in mind.

Amount Needed

Business loans typically offer higher amounts than lines of credit do.

Timeline

Small business loans typically have a lengthier repayment period. While lines of credit usually have to be repaid in a year or two. 

Constancy

Small business loans offer predictable payment plans.

Lines of credit are revolving, which allows your business to pay relative to the amount you draw on the line of credit, which can be different every time you draw on it.

Use of Funds

If your business is looking for financing to help fund short-term operating purposes as cash flow needs arise, then a small business line of credit may prove a better choice.

If your business needs access to large sums of working capital for a one-time expense or a sizable purchase, a small business loan might make more sense for your business needs.

The Bottom Line

While very different, small business loans and lines of credit can both offer flexible financing solutions for your small business.

Business financing options like these can give your small business the flexibility it needs to access fast working capital.

Understanding the different loans available and how they can work best for your business will help you make a more educated decision.