When it comes to running a small business, it is important to understand every aspect of that business. Getting a little extra money from the bank in the form of either a small business loan or a business line of credit can be incredibly useful at the right times. It is necessary, however, to understand the difference between the two before making a decision as to which will be most beneficial to a small business. Both have their advantages and disadvantages, and both are used for different purposes. It’s important to understand the differences between them.
Interest And Monthly Payments
Monthly payments are a necessary part of borrowing money. With a small business loan, those payments are fixed, a certain amount being paid each month toward the loan. This will make the payments a little larger, but they are always the same each month. With a Business line of credit, the payments vary based on how much has been withdrawn during the last month. Payments can often be less, if the money hasn’t been withdrawn in the month, or they can be higher, if a lot has been withdrawn in the past month.
Interest rates are higher with a business loan, at least from the start. Business loans often have higher rates, but they are, like the monthly payments, fixed rates. The interest rate will not fluctuate and will always be the same as when the loan began. Business lines of credit, though, usually have variable rates. This can result in lower interest rates, but these are the rates that will fluctuate from month to month. There is no guarantee that the rate will remain lower.
Uses And Timing
Business loans are used all at once. The money is withdrawn at once, and there is no other opportunity to pull money from the loan. For this reason, business loans tend to be used for one large purchase, something that is a onetime expense. Business lines of credit, meanwhile, can be drawn upon more often. Depending on the terms, a certain amount of money is always available for withdrawal, such as with a credit card. This makes a business line of credit the ideal for everyday expenses, or for unexpected problems with cash flow.
Length And Closing
A business loan usually comes with a set payment schedule. A certain amount, paid each month, for a certain amount of time before the loan is finished. Loans also come with little to no closing costs. With a business line of credit, it is different. Payments are based on how much has been withdrawn in a month, and there is no set schedule for the line of credit to end. A line of credit also comes with closing fees, and sometimes includes fees for each withdrawal as well.
Knowing every aspect of the business is important, and is what helps a business thrive. The differences between a business loan and a business line of credit are important to know before any money is withdrawn, and before any terms are decided upon.
Loren is a financial consultant working with a Mortgage Firm. She is a frequent Pinterest user. Recently she found about rapid advance reviews on pinterest and how they help business grow when they are stuck financially.