Business Line of Credit vs. Business Loan: Differences & Use Cases
In 2024, aside from business credit cards, the top two types of financing that small business owners applied for were business loans (50%) and business lines of credit (34%), according to the 2024 Small Business Credit Survey.
The three main reasons companies sought financing were to:
Meet operating expenses
Buy business assets or pursue opportunities
Have available credit for future use
If you also need funding for these reasons, you’ll want to understand the key differences between business lines of credit vs. business loans to help you make the right financing choice. In this article, we’ll cover:
The eligibility requirements and repayment terms
The use cases for each type of funding
How to determine which financing is best for your business needs
Business Line of Credit vs. Business Loans: The Key Differences
These two financing options differ when it comes to requirements, the approval process, and terms. Let’s take a closer look at business lines of credit vs. business loans:
Long term vs. short term: Business loans are ideal for long-term, capital-heavy investments, while business lines of credit work best for short-term expenses.
Term loan vs. revolving credit: With a business loan, you borrow a one-time lump sum. A business line of credit is revolving and renewable.
Collateral: Business loans tend to require collateral, while business lines of credit generally don’t.
Flexibility: Depending on the type of business loan you apply for, there may be restrictions about how the funds can be used. While a business line of credit can have limitations as well, they tend to be more flexible.
Approval process: Business loans have a stricter, intensive application and approval process that can take weeks or months. Business lines of credit require less documentation, and the process can be as short as 24 hours.
Borrowing terms: Business loans generally have better terms, such as lower interest rates, higher loan amounts, and longer repayment periods. Business lines of credit generally have higher rates and shorter repayment periods in exchange for the faster, more flexible financing.
To better understand how to take advantage of each funding’s strengths, let’s take a closer look at how they work.
What Is a Business Line of Credit, and How Does It Work?
A business line of credit is a revolving fund that you can withdraw from at any time and for any purpose. It’s similar to a business credit card but with a higher credit limit and lower interest rates.
With this type of financing, you only pay interest for the amount you borrow. Once you fully repay, that amount is once again available for you to use. Additionally, some lenders offer flexible payments like weekly or monthly payments.
While a business line of credit doesn’t have restrictions, it’s typically used to optimize cash flow and working capital. Because it’s geared toward short-term projects, a business line of credit generally has a shorter repayment period.
Below are its common use cases:
Paying for your operating expenses, such as bills and salary, during slow months when cash flow is tight
Prepping for seasonal sales periods, such as buying inventory in bulk
Upgrading machines and vehicles without using up your working capital
Launching marketing campaigns to take advantage of a new market opportunity or promote a new product
Hiring temporary staff for peak seasons
This funding’s eligibility requirements focus on current financial performance more than credit history. As such, they are less rigid than bank requirements. Application documents can include:
Business records, including the number of years in operation
Credit score and credit report
Annual revenue
Because of the minimal requirements, business lines of credit are more accessible to a wider range of businesses. However, because lenders assume higher risks, they can also impose higher interest rates.
What Is a Business Loan, and How Does It Work?
Business loans are term loans that deposit a lump sum of money upfront to the borrower’s business checking account. This type of financing is available from banks, credit unions, and private or online lenders. It can have variable or fixed interest rates.
Business loans can be short-term or long-term. They can also be secured (requiring collateral) or unsecured.
In general, this type of funding is ideal for long-term business expenses that require a lot of money, such as:
Building a new office, factory, or retail store
Renovating/retrofitting commercial real estate
Research and development to test out new markets and offerings
Buying a new fleet of service vehicles
Because these loans tend to give out higher amounts, they generally have a specific purpose. For example, real estate and car loans are strictly for buying properties and vehicles, respectively.
That said, there are more general business loans geared toward supporting small businesses across an array of funding needs. For example, U.S. Small Business Administration loans (or SBA loans), which are partially backed by the government, can be used for a variety of business needs, such as boosting working capital or refinancing debt. Because it’s a government program, this type of loan has competitive fixed rates.
When it comes to eligibility requirements, traditional loans from financial institutions (like banks) are the strictest in assessing creditworthiness. Their application requirements can include:
Financial statements
Business plan
Income tax returns
Proof of collateral
High personal and business credit scores
The lender uses these documents to determine creditworthiness, the amount of money to lend, the interest rate, the fees, and the repayment terms. Once approved, the borrower typically repays the loan via fixed monthly installments.
Business Lines of Credit vs. Business Loans: Which Type of Funding Should You Get?
First, you must establish why you need funding and how you’ll use the money. If you plan to make strategic, expensive purchases, you may benefit more from a long-term business loan. However, if you need the money immediately for an emergency or to have on hand for periodic operational expenses, a business line of credit is a good option.
You also need to evaluate your finances to see if you meet the requirements. A business line of credit often has more accessible eligibility criteria. However, if you have a robust credit history or many business assets, then you might prefer the high borrowing amounts and favorable terms of secured business loans.
It’s easy to become overwhelmed by the many small business loan programs available out there, so it’s best to compare products and lenders to see what meets your needs the most. Make sure to read all their terms and disclosures so you’re not surprised by fees and penalties.
Get the Flexibility You Need Through Backd’s Financing Solutions
You should now be better equipped to decide between a business line of credit vs. a business loan depending on your financing needs.
If you’re looking for fast, flexible funding, Backd can help. Our Business Line of Credit provides up to $750,000 and can be used for any purpose. Meanwhile, our Working Capital Advance offers up to $2 million in funding and can be paid back in daily, weekly, or semi-monthly increments.
We also do a soft credit pull during the application to ensure it doesn’t affect your credit score. Plus, you can receive an approval in as little as 4 hours after submitting your application.
Our eligibility requirements include:
$100,000 in monthly revenue
A credit score of 650+
Established business credit
Based in the U.S. with a brick-and-mortar address
Been in business for two years for a Business Line of Credit and one year for Working Capital Advance
Apply now to get easy, stress-free funding tailored to your business.
