The practical difference
| Question | Business loan | Business line of credit |
|---|---|---|
| How funds are accessed | One approved amount is disbursed. | Funds may be drawn up to the approved limit. |
| Common planning use | A defined purchase, project, acquisition, or refinance. | Recurring, seasonal, or uncertain working-capital needs. |
| Repayment focus | Payments follow the agreement for the outstanding loan. | Payments and available credit change as draws are made and repaid. |
| Cost question to ask | Total repayment, payment amount, term, fees, and prepayment terms. | Draw fees, unused-line fees, rate changes, minimum payments, and renewal terms. |
When a loan may fit
A loan can be easier to budget when you know the amount and timing of the expense. Match the payment schedule to the expected useful life or cash-flow benefit of the purchase. A short repayment period for a long-lived asset can create avoidable cash pressure.
When a line may fit
A line can provide flexibility when inventory, payroll, receivables, or project costs fluctuate. That flexibility does not make every line inexpensive. Review how the rate can change, when the line is reviewed or renewed, and what happens if the lender reduces the limit.
Compare offers on the same basis
- Write down the net cash you will actually receive.
- Calculate the total dollars required to repay the obligation.
- Map every payment to a realistic cash-flow forecast.
- Identify collateral, guarantee, default, renewal, and prepayment provisions.
- Ask whether any rate or payment can change and what triggers the change.
The Federal Reserve describes business loans and lines of credit as two of the most widely used forms of small-business credit. The SBA also offers loan and working-capital line programs through participating lenders. Neither source recommends one structure for every business.
Primary sources
General educational information only. This page is not a financing offer or legal, tax, or accounting advice. Actual products and terms depend on the applicant, provider, underwriting, and written agreement.