For any business to grow, raising funds is the first thing an entrepreneur thinks about. Sales may drop, urgent supplies might be needed, or other emergencies could arise. These situations create endless possibilities for a funds emergency in business.

So, what to do in such a scenario? Businesses can raise funds through conventional methods like bank loans and credit cards. There’s another option: a business line of credit.

Business Line of Credit vs. Bank Loans: Key Differences

A business line of credit is a flexible financial option. It allows a business to borrow up to a fixed credit limit. Businesses can withdraw funds as needed and repay them over time. The concept is similar to a credit card. You only pay interest on the amount borrowed, not the total credit limit.

Now, many might get confused trying to differentiate between bank loans and business line of credit, or even which is suitable for your business. To understand these concepts better let’s understand the basic difference between these two funding models.  

  1. Structure of the Loan: 

Bank Loan: A lump sum is provided upfront with a fixed repayment schedule. The loan is paid off over a set period, typically in monthly installments. 

Credit Line: It offers a revolving credit limit, allowing you to borrow, repay, and borrow again as needed. This provides ongoing access to funds.

  1. Purpose and Usage: 

Bank Loan: Ideal for specific, large expenses such as equipment, property, or business expansion, where a fixed amount is needed for a set purpose. 

Credit Line: Best for short-term, flexible funding needs like managing cash flow, inventory, or covering operational expenses on an ongoing basis. 

  1. Interest Rates: 

Bank Loan: Interest rates are typically lower and may be fixed or variable, based on the loan terms and the borrower’s creditworthiness. 

Credit Line: Interest rates tend to be higher. You only pay interest on the amount borrowed, not the entire credit limit.

  1. Repayment Terms: 

Bank Loan: Repayments are fixed and predictable, often on a monthly or quarterly basis, until the loan is fully paid off. 

Credit Line: It offers flexible repayment options, with only minimum payments due each month on the borrowed amount. There is no fixed repayment schedule.

  1. Approval Process: 

Bank Loan: The application process can be more detailed and time-consuming, requiring substantial documentation and taking several weeks to months for approval. 

Credit Line: Approval is generally quicker with fewer requirements, especially for unsecured lines. Funds are accessible more rapidly once approved.

  1. Collateral Requirements: 

Bank Loan: Secured loans typically require collateral (e.g., real estate or equipment), though unsecured loans may be available at higher rates. 

Credit Line: Secured lines require collateral, while unsecured lines don’t, but the latter often come with higher rates and lower limits. 

  1. Flexibility: 

Bank Loan: Less flexible, as the amount must be used for the specified purpose and the repayment schedule is fixed. 

Credit Line: You can use funds for various business needs and access them multiple times within the credit limit due to high flexibility.

  1. Credit Limits: 

Bank Loan: A fixed loan amount is determined at the outset, and once the loan is disbursed, the amount cannot be changed. 

Credit Line: Lenders provide a credit limit that businesses can borrow against. They adjust it based on the business’s financial performance over time.

  1. Impact on Cash Flow: 

Bank Loan: Fixed monthly payments can put strain on cash flow, as the business must repay the loan on a set schedule. 

Credit Line: This option is more flexible with cash flow. You only pay interest on the amount used and can borrow and repay as needed.

  1. Ideal Use Cases: 

Bank Loan: Suitable for large, one-time expenses or long-term investments where businesses need a lump sum of capital. 

Credit Line: Best for ongoing or short-term funding needs, such as managing seasonal fluctuations, covering gaps in cash flow, or addressing emergency expenses. 

Types of Business Line of Credit  

Now that we have differentiated bank loans from business lines of credit, let’s explore their types. Business lines of credit are mainly divided into secured and unsecured lines of credit.

Secured 

For secured business lines of credit, lenders usually examine your cash inflow and outflow. They may also ask for collateral, like real estate or a deposit.

This option is safer for borrowers because the interest rate is lower, and the borrowing limit is higher.
This is because the lender has collateral assets to recover the amount in case of missed repayments.  

Unsecured  

When borrowers need instant cash flow without collateral, an unsecured business line of credit is useful. The credit limit is lower with a higher interest rate. The urgency of the business determines the need for this credit line.

How to Get a Business Line of Credit?  

When you need to avail a business line of credit, follow these steps for a smooth application:

  1. Assess your business needs: This means getting a quotation of your requirements and figuring out how much funds are necessary or will be required in a certain amount of time.  
  1. Check your creditworthiness: This step involves checking your credit score, personal and professional, your business’s financial health and a rough estimation of the money your business might make in the next financial year or so.  
  1. Choose the right type of business line of credit: Be it secured or unsecured, according to your requirements and assets, make a choice of the type of business line of credit you want to avail.  
  1. Reach lenders: There are different types of lenders that are available in the market, like traditional banks, online lenders, credit unions or if you have personal connections, you can explore alternate lenders too.  
  1. Application: Once you have successfully completed the above steps, you need to fill out the application, meet the lender’s criteria and once that is done, you can avail yourself of your business line of credit.  

Conclusion  

Obtaining a line of credit benefits businesses during times of urgent funding needs. If you are looking for a secure business line of credit, then The Accredited Group is an option to consider.