Small Business Credit Line vs. Loans | Behalf

By January 14, 2017Business Financing
3 ways a small business line of credit is different than a loan

3 Ways a Small Business Credit Line is Different Than a Loan

Once upon a time, small business owners could walk into their local bank, explain their ideas to their friendly neighborhood banker, and walk out with a loan. These days business financing is not that simple. Banks are more reluctant than ever to loan to small businesses. Fortunately, technology has made it easy for small businesses to get alternative financing. New lenders have innovated upon traditional bank products, like a small business credit line, to make them more powerful for small business borrowers. A small business credit line can transform the working capital situation for a young and growing small business, giving them financial independence and flexibility.

You may find that a small business credit line, while limited, meets more of your business needs than a traditional bank loan. Both are legitimate forms of business financing, but as a small business owner you face the challenge of deciding which is a better fit for your business. This article explains how a small business credit line is different than a loan.

1) Function

The best way to differentiate between a small business credit line and a loan is how they function. With a loan, you get a specific amount of money all at once and pay it back over a set period of time. A loan is a one-time deal and once the funds are gone, they’re gone. In contrast, a small business credit line is revolving and gives you access to a bucket of funds that you can use as you need it. This ensures that you do not rack up financing fees on more funds than you truly need. A small business credit line can be used repeatedly because the available funds are replenished every time you make payments towards whatever amount you have used.

2) Purpose

Based on their function, a small business credit line and a loan serve very different purposes. A loan serves a specific purpose, so you only get it when you need it. Secure a loan for a large, strategic business investment – buying a building to house your operations, purchasing a book of customers from a competitor that is exiting the market – that you could only pursue with the ability to pay for it over a very long period of time. You will only receive the loan once you explain to your lender how you intend to use it. If you are looking for a more flexible option, a small business credit line satisfies short term business needs like operational costs and medium-sized business purchases, like new equipment or an increased product buy to meet your seasonal demand. In some cases, you may need both a small business credit line and a loan to cover your bases. A small business credit line effectively carries ongoing operational expenses and cushions your capital reserve. Small business lines of credit can become exhausted if you load them down with burdensome charges you cannot pay off right away.

3) Cost

Though there are exceptions, small business lines of credit are cheaper than loans. Why? Loans have closing costs that range between 2 to 7 percent. The closing costs for small business lines of credit tend to be lower or non-existent. Loans also have higher interest rates. Loans with fixed monthly payments are less cost efficient since they accrue interest even if they’re not consistently in use. You only pay on what you use from your small business credit line, making it more sensitive to your business activity.

At this point, you are leaning towards a small business credit line or a loan. Congratulations! You are one step closer to financing your business. Whether you need to cover operational business expenses or long term business investments, there is financing out there for you.

Ready to Apply for a Small Business Credit Line?

Behalf recognizes the potential small businesses have to grow the economy and has designed a credit product to empower small businesses to grow. The Behalf purchasing credit line is flexible and transparent, giving small businesses like yours the ability to buy the things they need to grow today and pay for them over time. With no hidden fees, you can customize your own payment schedule on each purchase, with up to six months of extra time. Behalf’s small business credit line is an affordable way to fund inventory, production and large business purchases. Get a decision when you apply online and pre-qualify for up to $50,000 in purchasing power.

Apply today.