Small business loans and lines of credit have some important similarities. They both offer businesses the opportunity to leverage existing assets in exchange for liquid capital, to be spent on a variety of relevant operational needs. However, there are some important differences between small business loans and lines of credit. Let’s review these two useful financial tools for organizations and highlight their differences.
Small business loans
A small business loan is, in general terms, a fixed amount of money provided by a financial institution to a new or growing enterprise. The allowed uses of the money are broad, and can apply to nearly any aspect of operations. The concept behind a small business loan is simple. A business owner requests the loan and, if approved, is generally given the entire amount requested. Then, the money is paid back over time, usually with a monthly debit.
Small business loans may seem hard to get, but alternative lenders such as National Funding make it easy to get approved. Our requirements are simple and already met by many companies: One year of continuous operation, $100,000 in yearly sales and sharing three months of bank statements. Consider these common reasons for requesting a small business loan:
Whether new or old, many small companies eventually want to increase their presence. A common problem involves business owners who do their research and know their markets , understanding expansion would lead to higher revenue and other favorable outcomes, but lack the funding needed to grow.
A small business loan addresses this issue, giving an infusion of cash that makes moving to a new facility or extensive purchasing of new equipment a reality. It can also address needs like an increased payroll, something that may be required for expansion but won’t see an immediate return on investment. This boost in available funds can mean the difference between a developing small organization and a stagnant one.
Addressing large and unexpected financial obligations
Constantly and effectively managing cash flow is a difficult proposition for many small enterprises. Because cash flow is a distinct concept that is related to but stands apart from revenue and profit considerations, it presents its own unique brand of problems. Your business may perform very strongly month after month, but the timing of tax bills, payments to vendors and other considerations can fall close together and create problematic cash shortages.
With a small business loan, you can avoid the crunch that lots of bills and other obligations create for your available, short-term cash reserves. The loan allows you to address these urgent requirements for payment, while your long-term revenue will help pay it back in a more manageable and predictable way.
You might not want to grow your business as a primary goal, instead focusing more on improving efficiency, effectiveness or other results mostly within your current framework. Whether it means replacing existing equipment, giving the customer-facing areas of your facility an upgrade or something else entirely, improving an area of operations is eventually a need for all businesses.
In this case, a small business loan allows your organization to address the exceptional price tag frequently associated with making improvements, paying back the debt owed over time.
Line of credit
Loans are common in people’s business and personal lives, but lines of credit are even more widely used. If you’ve ever had a credit card in your own name or that of your company, you’ve used a line of credit. A line of credit is significantly different from a loan because of the revolving nature of credit. While a loan usually involves a single, defined amount of money, credit can be replenished up to the credit limit through payments from your company.
As long as you continue to make the minimum payment on time, your business has access to the available amount of credit – which changes based on use and repayment patterns, but generally stays at a fixed limit. Over months and years, credit proves itself to be significantly different from a loan. Loans generally have a fixed term, while lines of credit can be used as long as minimum payment requirements are met and a business desires to continue their use.
Because a line of credit continues to exist, and the credit limit is often lower than the amount provided by a small business loan, its application is sometimes different than a loan. It can be used for the same needs that a loan addresses, but in a more limited way due to the frequently lower limit of funds. Lines of credit can also be used for smaller and more regular expenses and to smooth over continuing issues with cash flow.
Both small business loans and lines of credit have important applications in the world of business. Understanding the differences between them helps your company make the best possible decision for its future.