Financing Options for Small Businesses: Loans vs. Lines of Credit

Business funding is getting harder to come by now that interest rates are rising. And with more rate hikes from the Federal Reserve scheduled into the end of the year, the cost of capital will continue to increase as the era of easy money fades. Now more than ever, it’s crucial for business owners to be mindful of their funding sources and secure the best possible option for their needs. Small business loans and lines of credit are two of the major funding sources for companies, but which best suits your needs?

What is a Small Business Loan?

For small business owners, borrowing money is usually an important step in getting a company off the ground and fueling growth. Businesses need financing for a wide variety of things and often a small business loan is the best way to solve a capital shortfall. Small business loans are similar to personal loans in that they can be fixed or variable rates with different terms, lengths, and fees attached.

Small business loans can be issued by a bank, through the Small Business Administration (SBA), or by an alternative lender. Traditional banks tend to have stricter requirements and may not be ideal for startups that lack enough financial history. 

The length and amount of the loan will depend on the needs of the business. Short-term loans can have term lengths anywhere from six months to two years and usually provide relief for immediate business needs like payroll, inventory, or necessary repairs and upgrades. 

Longer-term loans are also available for business owners thinking about investing in the company for the long haul. With terms starting at three years or longer, these loans are geared more toward capital purchases like equipment, property, or long-term business investments. 

How is a Line of Credit Different From a Small Business Loan?

Not every business owner will need a lump sum of cash all at once. Small business loans offer owners all the funding upfront and require the money to be repaid over time. A small business line of credit is a different funding option, which opens up a capital source that the owner can tap as needed. A business line of credit is a revolving source of money that can be replenished and retapped over time. 

Here are some of the critical differences between the two:

Common Uses for a Business Loan

Business loans can be used to cover short- or long-term expenses. It provides upfront capital for businesses to expand their operations and increase revenue. Since a business loan is a single, lump sum of cash issued all at once, business owners often have a specific expense in mind for the funds. Here are a few common uses of business loans:

Common Uses for a Business Line of Credit

A business line of credit is more geared toward ongoing financing needs, akin to what you’d use a credit card for. However, many services and bills cannot be paid with a credit card, which makes a business line of credit very handy for certain company owners. Lines of credit also usually have higher limits than credit cards. Here are a few examples of how a line of credit might be used:

How Do You Qualify for a Small Business Loan?

Small business loans are provided by traditional banks, online or alternative lenders, and the federal government via the SBA. Loan amounts can vary from as little as $5,000 to as much as $5 million, depending on the size and credit worthiness of the business.

Some factors lenders may consider are credit history (for both you and the business), income statements, balance sheets, and other financial documents. Some lenders will offer friendlier terms if collateral like inventory or equipment is used to back up the loan.

How Do You Qualify for a Small Business Line of Credit?

In order to qualify for a business line of credit, you’ll still need to provide financial information like credit score and business history. Offering collateral such as inventory or equipment may increase the amount you receive or help you secure friendlier terms. Terms and amounts will depend on the lender. With so many options available, business owners will often speak with multiple lenders before deciding which is best for their business. 

Explore Your Funding Options with Aion

Aion can assist your small business with financing for a wide range of expenses. With term loans and lines of credit up to $2 million, Aion can provide the working capital business owners need to pay bills, purchase inventory, invest in marketing, and much more. Apply today to see which financing solution is the best fit for your small business.