Easy Comparison of Business Term Loan vs. Business Line of Credit Loan 

Due to the similarities between the two lending solutions, many confuse a business line of credit loan with business term loans.

While both can be valid options for managing your business cash flow and addressing your financial status, you might be wondering, “How does a line of credit differ from a term loan?”

Here’s everything you need to know about a business line of credit loan, a business term loan, and how each could benefit your business.

Business Term Loan: An Overview

A term loan provides businesses with a lump sum of cash UPFRONT. You can then spend it within this approved limit.

You must repay this fixed amount to your bank or lender over a repayment schedule with either a fixed or variable interest rate.

These are best used for purchasing assets, commercial property or improving cash flow.

They’re usually best suited for those with an established and stable business banking profile because it can help you get approval faster.

How Does a Business Term Loan Work?

Once approved, your small business receives the money upfront, which you can use over time.

Then, you’ll have to repay it every month. You must pay a minimum amount; any unpaid amount will incur additional fees over time.

You must also pay interest along with what you borrowed, plus additional fees to maintain your account.

At the end of the term, everything should be fully paid when the bank or alternative lender assesses your credit. This will determine if you can borrow more in the future.

Advantages of a Business Term Loan

These are some of the advantages of this financing type:

• They tend to have lower rates compared to other short-term loans.
• They can help build your business credit if you make your monthly payments on time.
• They’re best suited for short-term funding, like purchasing new assets or equipment for your business.

Disadvantages of a Business Term Loan

These are some of the disadvantages of this financing type:

• There can be additional fees, including a penalty for early repayments. It’s important to review carefully what your lender’s policy for early repayment is. 
• They can be harder to qualify for because they’re based on your credit history.
• Some lenders require collateral.

Business Line of Credit Loan: An Overview

A business line of credit loan, like those you can get with Lumi, gives a small business a specific lump sum to withdraw as needed.

The credit facility is based on what the lender knows you can repay. Once you withdraw money, you’ll have to pay it back with its interest so you can use your line of credit again.

They can usually be used to purchase new equipment, cover invoices, and keep your cash flow going even during a slower season. 

Unlike the previous funding option, a line of credit is often best suited for businesses that are either building their credit history, or for those that might not have the picture perfect credit. 

How Does a Business Line of Credit Work?

A line of credit provides businesses with a pre-approved amount of funds that they can withdraw if they need to purchase something.

You can usually choose between an unsecured or secured line of credit, which can affect how much you can borrow and the interest you need to pay. 

Once you get a line of credit approval, it’s common to have the funds available on the same business day as your application, making it easier and faster to access cash than other finance options.

You’ll also notice that your outstanding balance is only what you withdrew from your revolving line plus the accrued interest and any other fees that were agreed upfront. 

You can set up your repayments with your lender so they can be automatically debited from your business’s bank account. Once you pay them back, you can reuse your line of credit again for other purchases.

Once the period is done, you can procure a new assessment to determine if your credit line will be renewed, if you will have a higher credit limit, or if it will be decreased.

Advantages of a Business Line of Credit Loan

These are some of the advantages of this financing solution:

• You only need to pay the interest on the funds you used.
• It usually has a faster approval because it often doesn’t need asset security. 
• Both parties agree on facility and repayment terms.
• They can be a great solution for unexpected expenses or new business opportunities. 
• Quick access to cash and immediate liquidity.

Disadvantages of a Business Line of Credit Loan

These are some of the disadvantages of this financing option:

• There can be ongoing fees even if you don’t use your capital.
• It can have a higher interest rate compared to a standard loan.
• They can have other fees for the maintenance of your account.

Comparing Business Term Loans Vs. Business Line of Credit Loans

Both business loans give you easy access to working capital. However, the whole process of applying for these finance options and how you repay them can affect where and when you use them.

Here’s a general rule of thumb: 

Get a line of credit if…

• You want more flexible access to funds.
• You’re still in the process of building your credit history.
• You need a fast decision for funding.

Get a term loan if…

• You want a more fixed repayment scheme.
• You already have a good credit history.
• You require a set and larger amount to purchase a specific business asset. 

FAQs

You may have more questions about the business line of credit loan, business term loan, and how they can help your business.

We’ve gathered the most common ones to help you with your research.

How Is a Line of Credit Different From a Business Credit Card?

Business credit cards are almost always unsecured, meaning no collateral is involved.

This will allow traditional banks to charge high-interest rates and additional fees to offset the lender’s risk.

However, if you apply for a line of credit from lenders, you can offer collateral for lower interest rates.

Alternative lenders, like Lumi, can provide such business line of credit loans, potentially without requiring collateral but still provide a competitive interest rate to make it more accessible to customers.

The business credit card and line of credit have pros and cons when managing your business’s cash flow. It’s always best to weigh them to determine the right loan for you.

How Do I Know if I’m Eligible for a Business Line of Credit Loan?

Applying for a line of credit is usually easy for small businesses, especially if you plan to borrow from an alternative lender.

For example, to be eligible* for a line of credit loan from Lumi, you would need:

• Minimum of 6 months in the business
• Minimum monthly revenue of $5,000
• Active ABN or ACN

Every financial institution has differing requirements. It’s best to inquire with your lender. 

*Disclaimer: Additional eligibility and lending criteria apply. Loan applications are being assessed on a case by case basis. 

Conclusion

Small businesses can only function if there’s a constant flow of money. Whether with a term loan or a line of credit, both could help your company grow.

Look into your different finance options to find the best funding to help your business grow.