Business Loan vs. Line of Credit: Which Is Right for You?

Business loans are best for major projects, while business lines of credit make sense for ongoing costs.
Rosalie Murphy
By Rosalie Murphy 
Updated
Edited by Christine Aebischer

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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.

How much do you need?

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We’ll start with a brief questionnaire to better understand the unique needs of your business.

Once we uncover your personalized matches, our team will consult you on the process moving forward.

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.

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Bluevine - Line of credit
OnDeck - Online term loan
Funding Circle - Online term loan
NerdWallet rating 

5.0

/5
NerdWallet rating 

5.0

/5
NerdWallet rating 

4.5

/5

Est. APR 

20.00-50.00%

Est. APR 

35.40-99.90%

Est. APR 

15.22-45.00%

Min. credit score 

625

Min. credit score 

625

Min. credit score 

660

What is a business line of credit?

A business line of credit is a type of flexible business loan that can help you access 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 that want ongoing access to financing to even out their cash flow or to tap in emergencies.

Pros:

Cons:

  • Lines of credit tend to be smaller than business loans.

  • Lines of credit can come with additional fees such as annual, draw or inactivity fees. 

  • You may be required to sign a personal guarantee and a lender may file a Uniform Commercial Code (UCC) lien against your business.

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

Amount of financing

Varies widely, but loans usually offer more financing than lines of credit.

Varies widely, but lines of credit are usually smaller than loans.

Financing purpose

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.

Repayment terms

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.

Collateral requirement

Almost always requires collateral.

May require a personal guarantee or UCC lien.

Credit requirements

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 offers a wide variety of business loan and line of credit products with competitive interest rates, but they can be difficult to qualify for, and the application process may require meeting with a lending specialist. 

  • Chase offers business loans and lines of credit up to $500,000 for borrowers with strong credit (700+). They offer terms of up to seven years for equipment financing and five years for their line of credit. 

  • Wells Fargo has discontinued many of its term loan products but still offers SBA loans. You may qualify for an unsecured or secured line of credit with a minimum credit score of 680. 

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/or lines of credit include:

  • OnDeck offers business loans up to $250,000 and lines of credit up to $100,000, but their interest rates can be high. 

  • American Express® Business Line of Credit may be a good fit for business owners with fair credit who want access to capital, but their fee structure is complex. 

  • Funding Circle tends to offer lower interest rates on its business loans than other online lenders. The tradeoff is that loans are more difficult to qualify for and take slightly longer to fund. 

  • 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.