The Difference Between Business Lines of Credit and Loans

There can be many opportunities for learning and growth when running a small business, however, there can be plenty of challenges and stressors, as well. This can be true especially when trying to decide what type of financing will work the best for your business. That doesn’t mean, though, that you should necessarily feel concerned. With some research, it can be possible to discern the best path for you.

What Are the Different Kinds of Financing for Small Businesses?

When it comes to financing your small business, there are two common types of financing that many consider. One of these is a traditional loan. These loans are often provided by banks and may entail going through a lengthy process. Once you have been approved for a loan, you will receive your money in one large lump sum, that you will then have to pay back with interest over a previously agreed upon period of time. A traditional loan tends to be a better option for businesses that are more established, have good credit, or are otherwise able to commit themselves to regular payments in the long term. Another kind of financing that many small businesses consider are lines of credit. A line of credit is also a kind of loan, but instead of receiving a lump sum, you are allowed to withdraw cash as you need it, up to a specified limit, and then repay what you have withdrawn with interest. With a line of credit, you can withdraw money as often or as little as you need to and can use it for a variety of business expenses.

Comparing Traditional Loans and Lines of Credit 

Traditional loans and lines of credit both have their share of benefits. While a traditional loan may take somewhat longer to receive, and may also be a cumbersome expense for some small businesses, for those that are prepared to make the monthly payments, it can offer stability, and enable them to be better organized. With a line of credit, you often have more freedom and flexibility than you would with a traditional loan, however, if you struggle to stay organized, it could potentially be harder to track your spending. However, for many small businesses, the benefits of having flexible cashflow may outweigh any risks.

The Bottom Line

Finding ways to finance your small business may feel difficult at times, however, that doesn’t necessarily mean you need to feel discouraged. With a little research and some effort, it can be possible to discern the right financial path for you.

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