Funding, standing and growth are essential for the beginning of every business. But when you think about finance, then you must consider the financial condition of your business. You should think about what kind of business loan and how to get it. Many people have cash. But there are many merchants (in multiplicity) who opt for small business loans or instant business line of credit. Business loans and line of credit are taken to meet the capital requirements of the business such as purchasing new assets, increasing capacity, expanding into new markets and additional investment in growing the business. But business loans and line of credit fulfil their respective objectives.
An organization can choose either of these two options to meet its financial needs. But before we introduce you to its important points, let us know what these two mean.
As the name suggests, the lump sum amount is given by the NBFC or private lender to the merchant, so that he can fulfill his business requirements. In most cases the lender takes a loan for a fixed period at interest. Business owners and lenders agree on the interest rate and repayment terms before the loan amount reaches the account.
Business line of credit
Explain the business line of credit in simple terms, it works like credit cards, which has a fixed credit limit. Here the business has the option of getting funds according to its needs within the limits of the credit limit. A company can use only a part of its line of credit and after that interest will have to be paid on the loan amount according to the terms and conditions. For this, a contract is signed between the lender and the businessman.
Now that we have come to know what are these two small business loans and understand what is the difference between these two.
Many Users vs One Time User
Small business loans are given for single business. In most cases the lender will expect to get back a large part of the loan and will ask to pay with interest first before making a yes to the new loan. But the borrower can use the fund for any activity of the business according to his discretion, without even informing the lender.
At the same time, in the case of business line of credit, you can use the funds any time within the prescribed limit like a credit card. However, some lenders charge you to withdraw money every time. So while withdrawing money, definitely check that clause.
The lender will look at your business finance more than your personal finance for lending. To prove eligibility, your business must have had at least two years and last year’s revenue should be Rs 10 lakh. To get the line of credit, you have to maintain a great credit score. Apart from this, your income and debt to income ratio also determines merit.
After getting a business loan, you also have to pay the monthly installment. These monthly installments do not change throughout the period. So whether you use the credit or not, it will not affect your monthly installments.
But in line of credit you are entitled to the payment of the borrowed amount. If you have crossed your limit, then you will not be able to withdraw more money to meet your needs. First you have to pay the old amount.
Closing account cost
The closing cost of a small business loan is always higher than the line of credit. But there are many exceptions to this rule. The cost of closing the business loan will be 2-7 percent of your total loan amount. But the good news is that many emerging NBFCs are giving relief in this. If you want to close your loan prematurely after paying 6 EMIs, then they do not charge you. On the other hand, the cost of closing the line of credit is very modest. This is the biggest difference between the two.
Loan period (long term or short term)
Small business loans are generally better suited for long-term loans that are repayable over a longer period (eg over a year). Along with new emerging businesses, many short term loans are also becoming popular these days. You can also raise business funding for a month through invoice funding.
Due to the sudden increase in the need for working capital, the line of credit is considered best for short term. It is therefore advisable that the line of credit be used for immediate and short-term cash needs as it carries a high cost of funding.
Rate of interest
The interest rate of a business loan varies from lender to lender. But they are fixed and do not change again and again. When low long-term funding meets the initial high funding costs, it makes it a more efficient borrowing tool over the long term. If you are paying interest on a certain size loan then the lender regularly offers you a discount.
In the case of line of credit, the interest rate is low but variable. So, if a startup manages its line of credit poorly, pays late and crosses the credit limit, the interest rate can be very high. In addition, additional charges may also have to be paid. Even if he does not take any credit during the entire term.
When you will get business line of credit is different from business loan. Business loans are taken for a specific purpose, while the line of credit can be taken even before the need.
But keep in mind that line of credit is used in emergency because it strictly affects your debt-to-income ratio and credit report.
The term of the business loan is fixed. For this reason, the monthly payment of the loan is more than the monthly payment of the line of credit. But you can turn to other lenders like NBFCs, who offer short or long term loans without any guarantee, also at an affordable interest rate.
Note: Your home becomes a guarantee in the Home Equity Line of Credit. Therefore, if you are unable to repay the amount borrowed or any remaining interest, then the lender can legally seize your house.
In the end, both business loans and line of credit are various and profitable funding options that cater to small business capital needs. A potential business can use it to meet its short or long term capital needs.