All business owners, at some point, need to borrow money from other sources to maintain or upgrade their businesses.
It is crucial to carefully analyze your financing alternatives, whether you are starting a new business, filling a cash flow gap, or growing an existing one.
Applying for a business line of credit or taking out a business loan are the two most frequent choices for outside financing.
For most people, a business loan is the most common choice. It makes it possible for small enterprises with limited resources to fund a sizeable investment, a substantial acquisition, or an expansion, typically with fewer restrictions and cheaper interest rates.
Business loans are one financing option, but not the only one. Lines of credit are also quite commonly used, although not as much as loans.
In this article, we will give you a few reasons why lines of credit are better than business loans.
Qualification
Business loans often have tighter credit score criteria for application. Your personal and corporate credit reports are required by most lenders.
Some lenders do offer more flexible credit requirements, but in return, you will probably have to put up collateral and pay higher interest rates.
In general, it is much simpler to get approved for a line of credit. Lenders typically consider your credit history, whether personal or commercial, the number of years in operation, and annual income.
You stand a higher chance of being approved for a secured line of credit, even with an average or low credit score.
Additionally, lenders might disregard your credit rating in favor of collateral. Even yet, if your credit is bad, you can still pay higher interest rates.
A good option for raising your credit score is to open a line of credit. Most newly established businesses are ineligible for conventional business loans.
Therefore, a LOC can aid in the development of a credit history that may later enable you to obtain a business loan.
Types of Credit
The benefit of a line of credit is that you can withdraw money at any moment you choose.
Every time you require some cash, you have access to the whole amount, and you can use how much you need.
As long as you make consistent payments, you will have ongoing access to the money.
Loans for businesses, on the other hand, are only offered once. If you need extra money after that, you will have to submit a new loan application.
As a result, the convenience of lines of credit comes at the cost of slightly higher interest rates.
Funding Time
A line of credit typically funds more quickly than a typical business loan. This is a result of fewer prerequisites and qualifying standards.
Loan approval often takes a few days and even a few weeks. Which means it will take longer until the money is available after clearance. A LOC can be a viable option for swiftly accessing funds.
Payment Penalty
If you pay off your loan early, many lenders may charge you extra. It is referred to as a prepayment penalty.
By assessing a prepayment penalty, lenders try to recoup some of the interest they have already lost.
Flexible payments are a great feature of a line of credit. You are free to pay however much you like. This flexibility is helpful when there are slow months or changes in your cash flow.
You also will not need to be concerned about paying extra fees throughout a profitable month.
Additionally, you have the option of paying off your loan sooner so that you can use the whole amount of credit during difficult times.
A prepayment penalty on your business loan can be avoided in a few different ways. For instance, a lot of lenders let you pay back a portion of your loan in a single payment up to a specified amount.
Similarly to this, once you’ve paid off a particular amount, some lenders will lower or eliminate the prepayment penalty.
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Final words
Now that you know some of the advantages of line credit, you can see that it can be a great alternative to a business loan. Just keep in mind that whatever financial decision you make, take it seriously because it might have a long-term negative effect on your business.
