The primary difference between a Business LOC and a business loan is that with a credit line you can draw down the principal as needed rather than taking on a debt obligation as one lump sum. You only pay interest on the portion of the credit line that you have drawn down. Additionally, with a Business LOC you are able to repay the principal of the credit facility and reuse it again at a later time. A business line of credit works very similar to that of a credit card with the exception that it is to be used for business purposes rather than personal purchases.
Additionally, Business LOC facilities typically do not have a plastic card associated with their usage. In most situations, the borrower (you) are given a series of checks as if the credit line were a checking out with a finite balance. Each time that you need to drawn down the Business LOC you can write a check to a supplier, vendor, or to yourself (to be deposited into your operating account). This allows you tremendous flexibility when using a Business LOC.
In the case of a business loan, you are granted the full amount of the applied for credit once approved. In this case, you are required to pay interest on the full borrowed amount even if you are still waiting to use some of the debt proceeds. This is the benefit to a business line of credit versus a business loan. However, much like business loans, Business LOC can be applied for in a similar manner. The SBA has a number of programs that allow small business borrowers to acquire business lines of credit as if they were business loans.
If you do not intend to use all of the capital you require for one major purchase then using a Business LOC may be in your best interest. As we advise everyone, you should always speak to a qualified business accountant (who has a CPA designation) to determine which credit facility is most appropriate for you.
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