Small business financing comes in many different shapes and colors. Two of the most popular choices are small business loans and a business line of credit. These forms of financing are often talked about together as if they are very similar forms of financing. In reality they are quite different. Understanding the differences between the two is key to determining which form of financing might be right for your business.
A business loan is a debt that you borrow and make payments on. A business line of credit is an arrangement with a lender that approves you for a maximum amount you can borrow. With a LOC you can then make draws, or borrow against the approved maximum, as you wish.
We dive into the biggest differences between a small business loan and LOC below, but if you need access to cash fast then OnDeck can help you with either a short term loan up to $500k or a LOC up to $100k. You can be prequalified in minutes and funded within 2-3 business days.
Business Loan vs Line of Credit: Repayment Terms
The largest difference between a business loan and a business line of credit is how each facility is repaid.
When you take out a business loan you get the full funding amount at closing and immediately start making payments on that money. With a LOC you borrow what you need, when you need to, and you only make payments based on your outstanding balance and not the full line that you can draw down against.
Line of Credit
A LOC is also typically paid back faster. You can receive short term loans, like a loan from OnDeck, and pay it back in 3-36 months. However, OnDeck’s LOC product works a little differently. You must back off the balance on your line within 6 months of your last draw. So every time you borrow money then you get a new 6 months to pay off everything you owe at that point.
Business Loan vs Line of Credit: Loan Amounts
The maximum loan amounts are going to vary by lender, but generally they will be higher with a short term loan than they will be for a line of credit. This is because the lender doesn’t know when you plan on borrowing on your line. So the bigger your LOC the more risk they would have sitting out there without knowing for sure how much would be borrowed at any given time. With smaller lines the lenders can typically predict how much will be borrowed by their various customers.
You can borrow up to $500,000 with a short term loan from OnDeck. You can borrow much more if you take out a much longer term loan like an SBA loan.
Line of Credit
You can qualify for up to $100,000 for a LOC from OnDeck. Larger lines of credit through traditional banks can be had if you are a prime borrower and have collateral to put down to secure the line.
Business Loan vs Line of Credit: Costs
A business loan is going to generally be more expensive than a line of credit. While the APR may be similar for both financing choices, there are more fees with a business loan. Your loan will typically be in repayment longer than a line of credit, which will increase the amount of interest you will pay.
You can expect an origination fee with a short term business loan, and to pay 30% – 50% APR on a monthly basis. If you want to wait for the long application process of an SBA loan (which takes 45 – 90 days) then you can pay a single digit APR with a 10 year loan.
Line of Credit
If you get a line of credit through OnDeck you will pay between 13.99% and 39.99% APR. The term on a LOC is only 6 months so you pay interest on a fewer amount of payments than you would with a small business loan.
Who a Business Loan is Right For
A business loan is right for small businesses that need to make large purchases such as equipment or real estate. If your business needs a sizable amount of cash (more than $100k) to make a purchase or take advantage of growth opportunities then you should visit OnDeck. They can approve you for up to $500,000 in minutes and get you funded in 1-3 days.
Who a Business Line of Credit is Right For
A line of credit is right for you if you have a consistent cash flow shortage or if you are looking to protect yourself from unexpected costs in the future. It is nice to have a LOC on hand in case a large piece of equipment breaks and you need to fix it quickly You may not be able to wait to get approved for a short term loan. It’s always nice having the funds ready to draw on when you need them. If this sounds like you, and you only need up to $100,000 then OnDeck can help you with that as well.