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Do you know the distinction between a business loan and a business line of credit? Knowing the difference may be important for your business!

Loans versus Lines of Credit: A Brief Explanation

Loans and lines of credit are two common forms of financing that are used by businesses. Most people have an intuitive understanding of loans. A bank or lending agency gives you a lump sum of capital for a specific purpose. In turn, you must pay it back with interest, generally as a series of fixed monthly payments.

A line of credit is slightly different. It can be described as a “reusable loan.” It is like having a sum of money in reserve that you can tap into on an as-needed basis. You pay interest on the amount you borrow, and you repay your balance through fixed monthly payments.

Interest rates on business loans are usually fixed at the time the loan is granted. A line of credit often comes with a variable interest rate, since it is designed to be utilized more than once as time goes on.

Which is Better for Your Business?

It all boils don’t to your business’s needs and your intentions on how you wish to deploy the capital. For one-time needs, it may be better to obtain a loan. If, however, you anticipate needing a periodic infusion of capital, a line of credit may be better.

Lenders often have higher credit score requirements for lines of credit than for loans, although each lender is different. If your credit history is less than stellar, a loan may be a better option. 

Connect With the Ideal Financial Group

Here at the Ideal Financial Group, we’d like to be your business partner. Call on us for business financing options including loans, lines of credit, and other forms of financing that may be useful for your business.