Business Loan vs. Line of Credit: Which Is Right for You?
Many or all of the products featured here are from our partners who compensate us. This influences which products we write about and where and how the product appears on a page. However, this does not influence our evaluations. Our opinions are our own. Here is a list of our partners and here's how we make money.
Business loans and business lines of credit are different forms of business financing. With a business loan, you’ll receive a lump sum of money and pay it back over time. A line of credit is a pool of money that you can keep dipping into, up to a limit.
In general, business loans are the better choice when you need a significant amount of financing for a major purchase or expansion. Business lines of credit are better suited for evening out gaps in your cash flow or floating your finances through an emergency.
What is a business loan?
A business loan is a lump sum that you receive from a small-business lender and then pay back over time with interest. Business loans are best when you need financing for a specific project, investment or acquisition that will help grow your business.
Pros:
You can usually borrow more with a loan than you can with a line of credit.
In most cases, you’ll receive all your loan funds in one upfront payment.
Cons:
You'll typically need to secure a loan with collateral like real estate, inventory or cash savings.
Some types of business loans can only be used for specific purposes — for instance, if you take out an equipment loan, you can’t use it to pay your employees during a lean month.
» MORE: How to apply for a business loan
What is a business line of credit?
A business line of credit can help you get access to working capital whenever you need it. Lines of credit work in a similar way to credit cards — you can borrow as much money as you need up to your credit limit, and then pay it back over time. Lines of credit are best for businesses who want ongoing access to financing to even out their cash flow or to tap in emergencies.
Pros:
Lines of credit can be used for any business expense.
Some lines of credit are unsecured, meaning you won’t have to provide physical collateral.
Cons:
Lines of credit tend to be smaller than business loans.
Business line of credit vs. loan: How to choose
In general, business loans are best suited for financing specific projects. Lines of credit are more like business credit cards, making them useful if you want to tap into working capital on an as-needed basis.
The best choice for your business depends on how much financing you need, what you want to use it for and what you can qualify for.
Business loan | Business line of credit | |
|---|---|---|
How much financing do you need? | Varies widely, but loans usually offer more financing than lines of credit. | Varies widely, but lines of credit are usually smaller than loans. |
What do you need financing for? | A specific purpose. In your loan application, you’ll have to explain what you plan to do with your loan funds. | Can be used for any purpose. |
How do repayments work? | Installment credit — you receive a lump sum and pay it back in regular installments over time. | Revolving credit — you can carry a balance that accrues interest and pay it back as you’re able, then borrow more. |
Do you have collateral? | Almost always requires collateral. | Unsecured lines of credit do not require collateral. |
What product can you qualify for? | Tends to require good credit, multiple years in business and more annual revenue. | Usually easier to qualify for than business loans. |
Where to get a business loan or line of credit
Many banks and online lenders offer both business loans and business lines of credit.
Bank business loans and lines of credit
In general, bank loans are the hardest to qualify for, but they also tend to offer the lowest interest rates and most favorable terms. If you have multiple years in business and good or excellent credit, seek bank financing.
National banks offering business loans and lines of credit include:
Bank of America: Business loans and lines of credit. Bank of America offers a wide variety of business loan products with competitive interest rates, but they can be difficult to qualify for, and the application process requires a meeting with a lending specialist. Read NerdWallet's Bank of America business loan review.
Chase: Business loans and lines of credit. Chase offers small loans — business loans of as little as $5,000 and lines of credit with limits as low as $10,000 — which can be easier to qualify for than large loans and help you build business credit.
Wells Fargo: Business loans and lines of credit. You can get an unsecured or secured line of credit from Wells Fargo. The bank has discontinued many of its term loan products but still offers SBA loans.
Online business loans and lines of credit
Online lenders can be a good resource for newer companies or business owners with fair or bad credit. They also tend to fund loans more quickly than banks can, sometimes within a day. But their interest rates tend to be higher than those offered by banks.
Online lenders offering business loans and lines of credit include:
OnDeck: Business loans and lines of credit. Business owners with fair to good credit may be able to qualify for OnDeck loan products, but their interest rates can be high. Read NerdWallet's OnDeck review.
American Express Business Blueprint™: Lines of credit only. American Express lines of credit are a good fit for business owners with fair credit who want access to capital, but their fee structure is complex. Read NerdWallet's American Express Business Blueprint™ review.
Funding Circle: Business loans only. Funding Circle tends to offer lower interest rates than other online lenders, but loans are more difficult to qualify for and take slightly longer to fund. Read NerdWallet's Funding Circle review.
Bluevine: Lines of credit only. Bluevine lines of credit are available to business owners with as little as six months in business, but you may need to make frequent repayments. Read NerdWallet's Bluevine review.
How Much Do You Need?
