Business loans and lines of credit (LOCs) are two of the most popular types of business financing. They both offer competitive rates and fast funding and can be used for multiple business purposes. But LOCs typically have shorter loan terms, whereas term loans spread your payments out over a longer period. Each option has its own unique features that may make one financing solution better for your business than the other.
Business LOC vs. loan: A quick comparison
Details
Business LOC
Business term loan
What it is
Short-term renewable financing
Lump sum funding with longer terms
Best for
Working capital, ongoing projects, seasonal needs
Large one-time expenses, debt consolidation, equipment financing
Credit limits
Up to $250,000+
Up to $5 million
Interest rates
7% to 60%+
6% to 40%+
Term lengths
Typically 6 to 24 months
3 months to 25 years
Repayment structure
Varies by lender, but typically requires daily, weekly or monthly minimum payments. May only have to make interest payments during the draw period.
Equal monthly payments
Time to funding
As soon as the next business day after approval
As soon as 24 hours
Eligibility
Based on credit score, time in business and annual revenue
Based on credit score, time in business and annual revenue
Typical fees
Origination fees
Annual fees
Draw fees
Maintenance fees
Late fees
Origination fees
Late fees
What is a business line of credit and how does it work?
A business line of credit is a type of short-term, flexible financing. It allows you to draw on your credit line as often as needed up to your approved limit. And, while some lenders structure LOCs differently, in most cases, your credit limit replenishes as you pay it back. LOCs can be good for working capital, ongoing projects or to use as an emergency fund.
But terms are typically short for business lines of credit, usually two years or less. And you generally can’t borrow as much as with a term loan. You may also have to make weekly or even daily repayments, which could be difficult to manage.
How to qualify for a business line of credit
Exact requirements vary by lender, but here’s the minimum qualifications you’ll typically need to meet:
Six months to one year in business
Monthly revenue of $10,000 or more
Credit score of 600+
Online lenders that offer LOCs tend to have lower credit score requirements. A traditional bank may want to see a score of 670 or more.
Pros and cons of business lines of credit
Consider the benefits and drawbacks of business lines of credit before you decide if this is the right type of financing for your company.
Pros
Renewable funding source. Your credit limit replenishes as you repay it, so there’s no need to reapply for funding.
Only pay interest on what you borrow. Unlike business term loans, where you pay interest on the full amount, you’re only charged interest on the funds you use with an LOC.
Typically no collateral. Most business LOCs are unsecured, meaning you won’t need collateral to qualify.
Builds business credit. Business lines of credit can help you build your business credit, making it easier to qualify for financing going forward.
Cons
Shorter terms. Most LOCs have terms of 24 months or less, although some lenders may have longer terms or offer extensions.
Higher rates. Especially if your credit score isn’t ideal, interest rates for credit lines can be higher than for term loans.
Additional fees. Business lines of credit can potentially come with a number of extra fees that you won’t find with loans.
Payment frequency. LOCs often come with weekly or daily repayments, which can be a strain on your bank account and hard to budget for.
When to consider a business line of credit
Here are a few scenarios where an LOC might be the right move for your business:
You need an emergency fund. Because you only pay interest on what you borrow, an LOC can serve as back-up funding in case of an emergency.
For ongoing projects. A line of credit might make sense if you have a project going and you’re not sure exactly how much you’ll need to borrow.
Cash flow shortages. Whether you’re a seasonal business or just experiencing a lull, credit lines can help you cover short-term cash flow shortages.
What is a business loan and how does it work?
A business loan — also known as a business term loan — is a type of longer-term financing than a line of credit, with terms up to 25 years. Funds are disbursed in a one-time lump sum payment, and you’ll repay it in equal monthly installments. Because of the longer terms, you might qualify for a lower rate.
It also offers higher loan amounts than LOCs — up to $5 million or more — making it ideal for larger purchases. But term loans don’t offer renewable financing, you may need collateral and you could end up paying more in total interest for lengthy loan terms.
How to qualify for a business loan
The requirements to qualify for business loans are fairly similar to what you need for LOCs, and also vary by lender.
In business for at least six months to one year
Minimum monthly revenue of $10,000
670+ credit score
Depending on how much you want to borrow, you may need significantly higher revenue. If you’re using collateral to secure the loan, some lenders may accept lower credit scores.
Pros and cons of business loans
Business term loans have several attractive qualities, but consider both the advantages and disadvantages before making a decision.
Pros
Fixed payments. Unlike LOCs, term loans come with equal monthly payments, making them easier to budget for.
More flexible loan terms. With both long- and short-term options, business loans give you the flexibility to decide if you want to repay your loan quickly or pay it over time.
Larger loan amounts. With few exceptions, business loans typically allow you to borrow more money than you can with an LOC.
Lower rates. Depending on your credit history and other qualifications, you could potentially qualify for a more competitive rate with a term loan.
Builds credit. Like LOCs, business term loans also help you build business credit.
Cons
Funding isn’t renewable. Business loan funds don’t replenish as you repay, like a line of credit does, so if you need more financing, you’ll have to reapply.
Total interest paid. Longer loan terms may mean that your overall interest charges exceed what you’d pay on a short-term line of credit.
May require collateral. Some term loans may require collateral to secure the loan — such as real estate or equipment — which puts you at risk of losing the asset if you can’t make the payments.
Potentially higher revenue requirements. You can typically borrow more with a business loan than an LOC, but you may need to show stronger revenue to qualify.
When to consider a business loan
A business loan might be a better move than an LOC in these situations:
You need a higher loan amount. A business loan might be the right option if you need to borrow more than you can get with an LOC.
Purchasing large assets. If you’re looking to buy heavy equipment, real estate or another expensive asset, a term loan could be your best bet.
You prefer fixed payments. A predictable monthly payment can be easier to budget for, especially if your cash flow doesn’t support more frequent repayments.
Longer terms. If you’d rather repay your loan over time, business loans give you much longer repayment options.
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How we picked these
What is the Finder Score?
The Finder Score crunches 12+ types of business loans across 35+ lenders. It takes into account the product's interest rate, fees and features, as well as the type of loan eg investor, variable, fixed rate - this gives you a simple score out of 10.
To provide a Score, we compare like-for-like loans. So if you're comparing the best business loans for startups loans, you can see how each business loan stacks up against other business loans with the same borrower type, rate type and repayment type.
Business loans are typically characterized by larger loan amounts and longer terms, whereas LOCs tend to have smaller loans and short terms. Lines of credit may also require more frequent payments than business loans, and they tend to come with more fees.
The similarities
Both types of funding are popular ways to finance your business, and they have unique features that make either one a solid choice depending on your needs. If you need short-term renewable funding, an LOC might be the way to go. If you need to borrow a larger amount and want more time to pay it off, a business loan would be a better choice.
Plus, business lines of credit and term loans help you build business credit. This not only makes it easier to qualify for additional financing in the future, but also with better rates and terms.
Alternatives to consider
If neither a business loan nor a line of credit is the right fit, or you don’t qualify just yet, consider these alternatives.
Business loans marketplace. If you want to consider multiple business loan options in one spot, you may want to try a marketplace like Lendzi that has dozens of lending partners and dedicated loan specialists to help you find the best fit.
Revenue-based financing. For B2B companies, invoice financing or invoice factoring with a company like Fundthrough is a way to access capital without taking on new debt, but it can be pricey.
Home equity financing. Homeowners may want to consider a home equity loan — with terms similar to business loans — or a home equity line of credit (HELOC) to help fund your business.
Personal loan. It’s generally much easier to qualify for a personal loan than a business loan, making it a solid option if you don’t qualify for business financing.
Frequently asked questions
That depends on what you need the funds for. If you're looking to purchase a large asset, a term loan might be best. If you need working capital, an LOC could be a better fit.
Unlike a credit card, which you can draw on indefinitely, LOCs typically have short terms. You'll also want to watch out for fees and look for lenders that only charge minimal fees.
Possibly. Depending on how long you've been in business and how much revenue your company brings in, newer businesses may have a better chance with alternative business loans from online lenders.
Lacey Stark is a freelance personal finance writer for Finder, specializing
in banking, loans, investing, estate planning, and more. She has 20
years of experience writing and editing for magazines, newspapers, and
online publications. A word nerd from childhood, Lacey officially got her
start reporting on live sporting events and moved on to cover topics
such as construction, technology, and travel before finding her niche in
personal finance. Originally from New England, she received her
bachelor’s degree from the University of Denver and completed a
postgraduate journalism program at Metropolitan State University also
in Denver. She currently lives in Chicagoland with her dog Chunk and
likes to read and play golf.
See full bio
A review of QuickBooks Capital, which offers business loans up to $200,000 to companies that use the QuickBooks accounting software.
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