A business loan and a business line of credit both give your company access to money. They work in different ways, though. Each one fits a different kind of expense.
Here’s the short answer to the business loan vs line of credit question. A loan fits a single purchase with a known price, such as equipment or property. A line of credit fits costs that repeat or are hard to predict, such as inventory or payroll during a slow season. This guide is for small business owners in Southwest Ohio who want to choose the right kind of business financing, and here are three key notes you may take before we get into the details-
Key Takeaways
- Interest is charged differently: A loan charges interest on everything you borrow. Lines of credit charge interest only on the money you use.
- Payments work differently: Loan payments follow a set schedule. Line of credit payments depend on how much you’ve used and the terms of your agreement.
- You can have both: A business can use a loan for a large purchase and a line of credit for ongoing costs, subject to credit approval.
Business Loan vs Line of Credit in Plain Terms
A business loan is a set amount of money you receive once and repay over a fixed term. A business line of credit is a borrowing limit you can use, repay, and use again.
A business loan, often called a business term loan, is paid out as one lump sum. The loan amount, repayment term, and payment schedule are agreed on up front. If you need more money after the loan is repaid, you’ll need a new loan.
Lines of credit work differently. A line of credit is revolving credit. The bank approves a credit limit, and you decide when to use it and how much to take. As you pay down the balance, that credit becomes available again.
Is a line of credit a loan? Yes, it’s a type of borrowing. The difference between business loans and lines of credit is how the money reaches you. A loan is a one-time lump sum. A line of credit stays open for the length of your agreement. Learn more about business lines of credit at 1st National Bank.
How a Business Loan and a Business Line of Credit Compare Side by Side
The two options differ most in how you receive the money and what interest covers. This table shows how a business line of credit vs a loan compares.
| Feature | Business loan | Business line of credit |
| How you receive the money | One payment at closing | As needed, up to your limit |
| Interest is charged on | The full loan amount | Only the amount you use |
| Payments | Set schedule | Depend on your balance and agreement terms |
| Reusable after repaying | No | Yes |
| Typical uses | Equipment, property, expansion | Working capital, seasonal cash flow, inventory |
| Collateral | Often secured by the item purchased | Depends on the lender and your finances |
Will you pay interest on money you don’t use? Not with lines of credit. You pay interest only on the amount you draw, not the full credit limit. In that way, a line of credit is similar to a credit card. A loan works the other way. Interest applies to the full amount from the start because you receive all of it at once.
Loan or Line of Credit: Matching the Tool to the Job
The easiest way to decide is to look at the expense itself. Is it one purchase with a known price, or a cost that keeps coming back?
When a Traditional Business Loan Is the Better Fit
A traditional business loan fits when you know what you’re buying and about how much it costs. You receive the money at once. Your payment also stays predictable. You might opt for a business loan in these cases.
- The purchase will last for years: Machinery and buildings stay in use long after you buy them. A loan spreads the cost over time.
- You have a firm price: A seller’s quote tells you how much to borrow.
- You want a steady payment: A set repayment schedule is easier to plan around.
- You need a large loan: Larger amounts are often secured by the asset you’re buying.
At 1st National Bank, business loans include equipment purchase and refinance loans, commercial real estate purchase and refinance loans, and construction loans for commercial real estate projects.
When a Business Line of Credit Is the Better Fit
Business lines of credit fit expenses that repeat, rise and fall, or arrive without warning.
A landscaping company, for example, may have to purchase supplies and pay its employees in early spring before its customers pay. A line of credit might help cover the expenses until the invoices are paid. Lines of credit also meet these requirements.
- Uneven seasonal revenue: Money from the line can cover payroll and bills in slower months.
- Slow-paying customers: A draw can cover expenses while you wait on invoices.
- Stocking up for demand: You can buy inventory early and repay the line as goods sell.
- Emergency expenses: An open credit line gives you a backup source of funds.
A line of credit offers flexibility for costs like these. You can also read about working capital options.
What Happens If You Use the Wrong One
Using the wrong option can cost you more in interest or leave you short on credit when you need it.
Let’s say you acquire equipment with your line of credit. The sum can stay high for a long time because equipment can take years to pay back. There may be little credit left when a sluggish month comes.
Now imagine you take out a loan to get through some slow months. The disadvantage is that you pay interest on all of it, even if some of it is sitting idle.
So which one is the best? Neither is superior in every instance. When comparing a business loan vs a line of credit, the first thing to consider is how long you’ll need the money. A long-term buy usually means a debt. Lines of credit are usually considered short-term costs.
What a Bank Reviews Before Approving Either One
Banks review similar information for both options.
For a business line of credit, 1st National Bank may require a good company credit score as well as your personal credit score. You may also be required to open a business bank account and provide financial papers, such as tax reports. If applicable, information regarding your business’s assets may be asked. Eligibility is often determined by credit history, asset ownership, revenue, and years of business. Because personal and commercial credit can both be checked, having good credit benefits with any option.
A secured business line of credit or loan is typically collateralized by assets such as equipment or property. An unsecured line of credit or unsecured business loan is not backed by specific assets; hence, approval is based on credit and cash flow.
Is one easier to get? Not automatically. Approval depends on your credit, cash flow, the amount you request, and any collateral. At 1st National Bank, loan decisions are made locally. Before you apply for a business loan or line of credit, you can meet our commercial lenders.
Bring Your Plan to a 1st National Bank Commercial Lender
If you plan to get a business loan or line of credit, a commercial lender can help you decide which one fits. Share what you plan to pay for, what it costs, and when you plan to pay it back. The lender can then help you make the right choice for your business. That may be a business loan and a business line of credit together, or just one of them.
1st National Bank has banking centers in Centerville, Lebanon, Liberty Township, Maineville, Mason, and Morrow. To get started, send us a message through the contact form below, call 513-932-3221, or visit your nearest banking center.
Frequently Asked Questions About Business Loans and Lines of Credit
Can a business have a line of credit and a business loan at the same time?
Yes, as long as each one is approved. A company might use a loan for a large purchase, such as equipment. A line of credit gives it room for ongoing costs like inventory or seasonal gaps.
How is a business credit card different from a business line of credit?
Both are revolving, so in that sense, lines of credit are similar to credit cards. A business credit card is another option, but it’s usually used for smaller everyday purchases. Lines of credit for business typically cover larger working capital needs, such as payroll or inventory. For routine spending, 1st National Bank offers business credit cards.
Which costs less, a business loan or a line of credit?
Neither financing option is cheaper in every case. The interest rate, fees, and collateral requirements vary by lender, product, and borrower. Loan interest applies to everything you borrowed. With lines of credit, interest applies only to what you draw, so a small draw repaid quickly can keep costs down.
Do I need collateral for a business loan or line of credit?
Not always, but it’s common. A business loan may be secured by the asset being purchased, such as equipment or property. A business line of credit may be secured by business assets or unsecured, depending on the lender and your finances. When you apply for a line of credit at 1st National Bank, you may be asked for details about your business assets.
How much can my business borrow?
There is no single answer. Lenders often consider your earnings, credit history, and any collateral. 1st National Bank provides lines of credit tailored to your company’s needs. A commercial lender can analyze your data and discuss a reasonable amount, as well as the applicable interest rate.
This article is provided for general informational purposes only and is not intended to constitute financial, legal, or tax advice, or an offer or commitment to lend. Loan products, terms, eligibility requirements, collateral requirements, and availability may vary and are subject to credit approval and applicable underwriting standards. Contact a 1st National Bank commercial lender for information about your specific financing needs. Member FDIC.