What is a business line of credit vs. a small business loan?

A business line of credit is a revolving credit account that lets you draw funds as needed, repay, and draw again, while only paying interest on loan amounts you actually use. This funding option is best for flexibility and short-term needs.

A small business loan offers a fixed lump sum of money that is repaid over time. Business loans are better suited to long-term business goals and expenses.

What do “line of credit” and “term loan” mean?

Before you apply for business funding, you should understand loans and lines of credit and how they compare.

• Business line of credit (“business LOC”): A business line of credit is a revolving fund you access on demand while only paying interest on amounts you actually borrow.
• Small business loans (“line of credit loan,” term loan): These loans are received in a lump sum upfront and repaid on a fixed schedule.

Note: Business lines of credit and small business loans can be unsecured (without collateral) or secured with collateral.

Why should a business use a line of credit right now?

• Cash flow flexibility: Business lines of credit are ideal for seasonal dips in revenue or temporarily increased operational costs.
• Quick access: Many lenders offer instant online line of credit approval, which means you can get funded quickly.
• Builds credit: Business lines of credit can improve your business credit score if you never miss a payment or pay after the due date.

How can I apply for a business loan or line of credit?

1. Assess your finances. Consider your personal credit score, cash flow, and time in business to determine if you would qualify.
2. Compare lenders. Compare borrowing options across banks and online lending platforms.
3. Prepare documents. Put together the paperwork you'll need for funding, including tax returns, a business plan, your business credit information, and more.
4. Apply online. Many lenders let you apply for credit for business online without the need to speak with a loan professional

What are the pros and cons of business lines of credit?

Pros

• Pay interest only on what you use
• Reuse funds after repayment
• Builds business credit
• Secured and unsecured options available

Cons

• Variable interest rates
• Lower borrowing limits than loans
• Extra fees (draw/maintenance)
• Risk of overuse without a repayment plan

When does a business line of credit make sense?

Use a business line of credit (LOC) if:

• You have fluctuating revenue
• You want access to funds without a full loan commitment
• You need short-term financing
• You plan to grow and can repay from future income

What’s the difference between a business line of credit and a term loan?

A business line of credit and a term loan differ primarily in how funds are accessed and repaid.

A business line of credit is a revolving account that allows you to draw funds as needed, repay, and draw again, paying interest only on what you use. This makes it ideal for managing short-term cash flow fluctuations or recurring operational expenses.

In contrast, a term loan provides a lump sum of capital upfront, which is repaid over a fixed schedule with interest on the entire amount. Term loans are best suited for larger, one-time expenses like purchasing equipment, expanding facilities, or funding long-term projects.

Key differences include:

• Structure: Lines of credit are flexible and revolving, whereas term loans are fixed and non-revolving.
• Repayment: LOCs allow interest-only payments until the principal is due. Term loans require regular principal and interest payments for the duration of the repayment period.
• Use cases: LOCs are ideal for short-term needs, whereas term loans support long-term investments.
• Borrowing limits: Term loans usually allow larger amounts. LOCs tend to offer lower limits.
• Fees: LOCs may include draw and maintenance fees, while term loans may charge origination or prepayment fees.

By understanding these distinctions, you can choose the financing option that best aligns with your business’s financial strategy and growth goals.

Who are the top lenders for business lines of credit?

• Traditional banks (like Bank of America's business line of credit): Big Banks offer lower rates but may have stricter qualifications.
• Fintechs and online lenders: Online lenders can offer faster approval and may have looser requirements to get funding.
• Credit unions: Credit unions may offer a more personalized experience with the potential for lower loan costs.

What mistakes should I avoid with a business LOC?

• Using it like free cash
• Not budgeting repayment
• Overlooking interest or maintenance fees
• Skipping APR comparison