Though they are often confused, a business loan and line of credit have few similarities: You get cash, you get charged interest, and you need to pay it back.

Let’s clarify how these options are different and determine when each financing option is the “better” offer.

A business loan is primarily for long-term financing. 
It provides a lump sum of money and needs to be repaid by a predetermined time frame. 

Benefits of business loans: 
1. Fixed interest rates, so the rates don’t increase. 
2. Lower interest rates (when there’s collateral).
3. Interest payments can be deductible on your taxes.

For accounting purposes, it helps to match the long-term costs with the long-term revenue it generates.  

The drawbacks:
1. Strict lending requirements make it difficult to qualify.
2. The risk of losing the collateral.
3. A bank loan will affect the valuation of your business.

The numbers:
– Loan amounts: $10,000 to $100,000
– Fixed interest rates: 7% to 22.99%
– Interest rates with a secured loan can go as low as 5.50% 
– Repayment terms: 1-5 years

Secured loans for equipment often have advantageous solutions like:
– 100% of financing secured by purchase
– Flexible payment terms to match company cash flow
– Fixed rates starting at 5.5% for vehicles
– No annual or prepayment fees

Business term loans are a smart choice when you’re growing your business. 
For example, purchasing machinery, expanding offices, or investing in a new venture that lets you sell more products faster, ultimately increasing monthly profits.

A line of credit is primarily for short-term needs.
It offers access to funding that lets you borrow, repay, and borrow again. (Yes, like a credit card.) Interest is only charged on the amount of money you’ve withdrawn but at a variable rate.

Benefits of a line of credit:
1. It’s an available safety net, where cash is available immediately.
2. You don’t pay any fees until you use the funds.
3. You can reuse credit after it’s been repaid.
4. There are no collateral or closing costs. 
5. Monthly repayments allow for a “minimum payment”. (This is not a good long-term solution, but it can be beneficial when your “business season” is coming up.)

The drawbacks: 
1. The interest expense is nondeductible.
2. There is a greater temptation to spend due to easy access to funds.
3. The amount of interest charged can increase and is difficult to predict.

The numbers:
– Loan amounts: $5,000 to $100,000
– Variable interest rates: starting at 6.25%
– Annual fees: starting at $50 
– Repayment terms: Revolving credit usually up to 5 years

A line of credit is suitable when you want to balance seasonal sales, seize a short-term asset opportunity – like available inventory, or for sudden unexpected expenses – like repairs.

So, does it matter which offer or financing option you choose? Absolutely. 

Call Equire and our friendly representatives will help you make an educated decision on which financing option is the one for you. You’ve got this!

Taking a loan out during COVID-19, is this the right business move? Find these answers here.