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Clash of Cash: Small Business Loans vs. Lines of Credit

Posted by Anthony Senerchia Jr. | May 08, 2024 | 0 Comments

When starting or expanding a small business, one of the most critical decisions an entrepreneur faces is how to fund their venture. What are the advantages and disadvantages in the small business loans vs. lines of credit debate?

Oftentimes, business growth is held back by a sort of “chicken-or-the-egg” scenario in which the business owner needs to hire or invest in a resource to grow, but they can't afford the investment unless they have grown the business first. Financing can help you jump the chasm of being stuck in that loop.

Two popular financing options are obtaining a business line of credit from a bank and securing a business loan.  Each has its unique advantages and disadvantages, and choosing the right one depends on various factors, including the nature of your business, your financial health, and long-term goals. It can get complicated, especially if you're new to business ownership, but you don't have to figure it out yourself. Instead, let's navigate this together, shall we? In a future article, we'll look at another type of business credit, using credit cards and how to do it right so you don't ruin your credit score in the process - so stay tuned. But, first … 

Bank Business Credit: Your Money Bucket

What exactly is a business line of credit? Think of it like a bucket that holds money. You can fill your bucket with money whenever you need it, up to a certain limit set by the bank or lender. You can take money out when you need to pay for things like new equipment, more inventory, or even to fix unexpected problems. Then, as you put money back into the bucket by paying it off, you can take it out again whenever you need it, as long as you don't go over the limit.

Here are some advantages of using a business line of credit:

       Flexibility: Business credit lines offer flexibility that loans cannot match. You can draw funds up to a certain limit, repay, and then borrow again, which is particularly useful for covering short-term cash flow shortages or unexpected expenses.

       Only Pay for What You Use: Unlike a business loan, where you receive a lump sum and start paying interest on the entire amount immediately, with a credit line, you only pay interest on the amount you've drawn down and used. This can result in significant cost savings if you don't need the entire credit line at once.

       Builds Business Credit: Regularly using and repaying your business credit line can help build your business's credit history. A strong credit history can make it easier to secure additional financing in the future at better terms.

Sounds good, right? Well, your money bucket has some disadvantages, too:

       Higher Interest Rates and Fees: Business credit lines often have higher interest rates than traditional loans. There may also be additional fees, such as annual fees or transaction fees, which can add to the overall cost of borrowing.

       Variable Interest Rates: Most business credit lines have variable interest rates, which means the cost of borrowing can increase if interest rates rise. This unpredictability can make budgeting for repayments more challenging.

       Requires Strong Credit: Qualifying for a business credit line typically requires a strong credit history and financial performance. Startups or businesses with poor credit may find it difficult to qualify.


A money bucket probably sounds pretty nice right about now. But there is another option that may be even better for you: a bank business loan.

Bank Business Loans: Your Rocket Fuel

Essentially a bank business loan is a financial boost provided by a bank to help businesses fund their growth, cover operational costs, or finance major purchases. It's a little like a giant booster rocket for your business. 

You're ready to launch into the market and explore new opportunities, but you need a big burst of cash to make the necessary investments to get off the ground. The bank steps in (usually backed by the Small Business Administration), agreeing to give you the funds you need, but with a catch: you need to promise to repay the loan, just like you would with a home mortgage, but over a much shorter period.

During the pandemic, the SBA made loans available at 3.75% interest payable over 30 years. Now SBA loans are typically in the 7-10%  range and are payable over a much shorter period. And, several private lending options have sprung up, like Quiq Capital and Hum, with rates available in the 15-20% range, payable over 1-3 years.

Let's look at  the advantages of using a bank business loan:

Lower Interest Rates: When compared to business credit lines bank loans generally offer lower interest rates. For long-term financing needs, a loan can be a more cost-effective option.

Fixed Payments: Loans come with fixed repayment schedules, making it easier for businesses to budget and plan for the future. Fixed interest rates also protect against the cost increases that can affect credit lines if interest rates rise.

Lump Sum Financing: Loans provide a lump sum of cash upfront, which can be crucial for significant investments such as purchasing real estate, heavy machinery, or undertaking major renovations.

Of course, there are also disadvantages, some of which are:

       Less Flexibility: Once a loan is disbursed, you cannot borrow more without applying for a new loan. This can be a drawback for businesses if they encounter unexpected expenses or opportunities that require additional funding.

       Early Repayment Penalties: Some loans come with early repayment penalties, making it costly if you decide to pay off the loan ahead of schedule. This can limit your ability to reduce interest costs by repaying early.

       Lengthy Application Process: The process of securing a loan can be lengthy and require extensive documentation, including business plans, financial statements, and personal financial information. This can be a significant hurdle for new or small businesses.

Phew! That was a lot of information. But now you know what business loans and lines of credit are, and you're aware of the pros and cons of each. So let's switch gears and discuss how to pick the right option for you.

Which is Better for My Business?

The decision regarding small business loans vs. lines of credit largely depends on your business's specific needs and financial situation. What are your immediate and long-term priorities? If you require flexibility and anticipate needing funds on an ongoing basis for short-term needs, a business credit line might be more suitable. It offers the ability to manage cash flow effectively, though often at the cost of higher interest rates, so be aware of the trade-off.

Conversely, if you have a one-time, large-scale investment in mind, a loan might be more appropriate. Loans offer the advantage of lower interest rates and fixed repayment schedules, making them ideal for long-term financing needs. However, the lack of flexibility and potential early repayment penalties are important considerations.

In either case, it's crucial to carefully consider your business's financial health, the predictability of your cash flow, and your ability to meet repayment obligations. It's also wise to consult with a trusted advisor who can provide tailored advice based on your business's unique circumstances.

At Senerchia & Senerchia P.C., we understand the unique challenges and opportunities that come with managing a business. Our dedicated team offers specialized legal services tailored to support and protect your enterprise. Schedule a free 15-minute call to learn how we can work with you to secure the financing you need to grow your business. 

About the Author

Anthony Senerchia Jr.

Anthony Senerchia Jr. is an accomplished Attorney at Senerchia & Senerchia PC and COO of Dimension National Title. Anthony stands as a distinguished figure in the legal community, with an impressive array of bar admissions across Rhode Island, Massachusetts, Connecticut, and New Hampshire, including prestigious appointments to the US District Courts of Rhode Island, New Hampshire, and Massachusetts between 2019 and 2023. His legal journey began at the University of Massachusetts Law in Dartmouth, where he earned his Juris Doctor in 2019, preceded by a Master of Science from Worcester Polytechnic Institute in 2014, and a Bachelor of Science from Roger Williams University in 2010.


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