Business Loan vs. Business Line of Credit: Which Funding Solution is Right for You?
While there are a variety of funding solutions available to small business owners, some that can be helpful to consider are business loans and business lines of credit. According to the 2022 Small Business Credit Survey, of businesses that sought financing in 2021, 72% sought a business loan or line of credit product. Depending on your needs, both can be beneficial to your business’s financial health and overall growth.
If you’re considering funding for your business, it’s important to understand the difference between business loans and business lines of credit to make a decision that can work for you and your business.
Here’s a general breakdown of business loans and business lines of credit, including what lenders often look for, and how they typically work.
How a business loan works
Of the businesses that sought business loans or lines of credit in the aforementioned 2022 Small Business Credit Survey, business loans specifically had a 43% application rate. It’s certainly still a viable funding option for small business owners to consider.
Some of the criteria a lender may look at when considering you for a business loan may include:
- Your credit score
- Your time in business
- Your business’s cash flow trends
- Your business plan
- Your financial statements
Although business loan approval qualifications can vary based on the issuing lender, in general, a small business owner’s candidacy is determined by their overall creditworthiness. It’s helpful to assess some of the aforementioned data on your business and measure how well it aligns with your prospective lender’s criteria before you apply.
Before deciding if this type of funding is right for you, it can also help to take a close look at the terms of the business loan. While they vary from lender to lender, typically, traditional business loans tend to have longer, more fixed repayment terms when compared to other funding solutions.
How a business line of credit works
While the majority of small businesses applying for credit in 2020 applied for business loans, 30% applied for a business line of credit, according to the 2022 Small Business Credit Survey. With many providers offering online accessibility, a business line of credit can offer a convenient source of funding for a small business. While exact terms vary by product and lender, generally, a line of credit allows you to increase your available cash flow on an as-needed basis.
For many business owners, a line of credit can be more attractive than a traditional business loan because of its flexibility in access and repayment. A line of credit can contract and expand as your business ebbs and flows, and the costs fluctuate based on how much you have used.
Meet Kabbage Funding™
Apply in minutes for a business line of credit from $2K-$150K with Kabbage from American Express. If approved, have flexible access to your funds: use what you need, when you need it. Learn more.