A business is only as strong as its financial prowess and if you don’t have the necessary capital to make all the right moves early on, while your company is growing, you will find it extremely difficult to find a steady foothold in the market later on. It is for this reason that many companies opt to get a form of financial aid. The most popular solutions are to apply for a business loan or request a business line of credit. If you’ve never dabbled with either before, the terms might be a little confusing, so we’re going to take a look at what they mean and what the differences are.
Applying for a business loan
A business loan is no different than a regular loan, in the sense that it represents a lump sum which is given to you in one go. You are then able to use this cash in any way you see fit, with the agreement that you will pay back the sum, plus interest, according to a date agreed upon by both parties.
- The main characteristic of a business loan is that it is a finite loan, meaning that you only receive one full payment, with no more coming afterwards. Unlike a line of credit, it has a predetermined start and end date.
- A business loan is best suited for business owners that are confronted with unexpected costs or expenses that just came out of the sudden. This is the category where you put in anything from accidents, equipment damage, unexpected taxes and other similar things. The fact that the loan comes in one big lump sum allows the owner to fully pay up that debt or expense and go about their business smoothly.
Applying for a line of credit
A line of credit for business is also similar to a regular line of credit. Getting a line of credit or credit card involves striking a deal that would give you access to a nearly unlimited cash supply. Of course, it’s not as sweet as it sounds. There is actually a limit to this credit, and every time you take money out of your credit, that limit goes down, making the credit smaller and smaller. With that said, paying back what you have borrowed from the credit line will fully restore the original credit limits.
- Unlike the loan, this form of borrowing money can go on for a much longer period of time and granted you always pay back what you owe, you can continue to benefit from your line of credit.
- This type of financial aid is great for entrepreneurs that need help with regular expenses. While some costs are a “one time only” type of thing, there are also regular costs like maintenance bills, supplies, salaries and similar costs.
- Choosing between a line of credit and a business loan is not really a matter of which is better but of which is better suited for your specific requirements. Depending on what kind of needs you have, one or the other should appear more appealing to your organization.