Connection Information

To perform the requested action, WordPress needs to access your web server. Please enter your FTP credentials to proceed. If you do not remember your credentials, you should contact your web host.

Connection Type

What is a Business Line of Credit?

What is the Difference Between a Loan and a Business Line of Credit?

Loans vs Business Line of Credit

Sometimes borrowers use the words “loan” and “line of credit” interchangeably, but these are in fact two different lending products. I’d like to call attention to some important differences between these two products.

When a $50,000 loan is issued to a borrower, the lender expects the entire amount, plus interest, to be paid back in X number of years. When an applicant walks away from the bank after being approved for a loan, they usually have a check for the whole $50,000. Each month that a payment is made, the loan balance decreases. Once the balance hits zero, nothing more is owed to the bank and consequently the bank has no additional obligation to reissue another loan to the borrower. The loan has been retired.

When a $50,000 line of credit (LOC) is issued to a borrower, the lender doesn’t expect the entire amount to be paid back at a certain time in the future. (This is usually the case – there are exceptions.) When a successful LOC applicant walks away from the bank, they typically don’t have a check in hand for the full amount; they usually have a checkbook or a credit card with a zero balance. The borrower doesn’t have to make payments on the LOC until they actually spend the money. If they spend the full $50,000 (or some lesser amount) to purchase some advertising for their business, they are then obligated to start making payments to the lender, according to the LOC Terms.

The most important distinction between a loan and a LOC is if the borrower pays the balance down to zero on a LOC then they can spend the money again. If the borrower pays off a LOC a second time, they can continue to “dip in” as needed. It’s a cycle that could last for years as long as a good relationship with the lender is maintained. This is not the case with a loan.

There is a time and place where both loans and lines of credit should be used in your business. If you need money for certain project or for a set period of time, you might want to consider a loan. Interest rates are typically more favorable with a loan. If you want some emergency money “just in case,” I’d definitely recommend a LOC. This way you don’t have to make monthly payments unless you use it; you don’t want to pay interest on money that isn’t being used. The key is having access to capital, not necessarily having it in the bank.

Learn More About Business Lines of Credit

Finance Your Own Business

Our upcoming book Finance Your Own Business: Get On The Financing Fast Track details the power of business credit, how to get an SBA loan, the secrets of micro lenders, the benefits of crowdfunding and more.

Fill out the form on this page and we will let you know when the new book is released and offer early bird discounts. Plus you’ll get a free guide today – The Levels of Business Credit. (And don’t worry: we know you’re busy so we won’t flood you with email.)

About the Authors

Garrett Sutton, Corporate Attorney & AuthorGarrett Sutton, Esq., author of Start Your own Corporation, Run Your Own Corporation, Loopholes of Real Estate, The ABC’s of Getting Out of Debt, Writing Winning Business Plans and Buying and Selling a Business in the Rich Dad Advisors series, is an attorney with over twenty-five years experience in assisting individuals and businesses to determine their appropriate corporate structure, limit their liability, protect their assets and advance their financial, personal and credit success goals.

GerriGerri Detweiler is the author of four books, including the Ultimate Credit Handbook (named one of the top five personal finance books of the year when it was released), and a media favorite quoted in publications like USA Today, The Wall Street Journal and featured on The Today Show and CNN. A credit educator since 1987, she’s served on credit reporting agency Experian’s Consumer Advisory Council twice.

Get Discounts on "Finance Your Own Business"

  • captcha

Business Financing Resources

  • Nav
    Get a free business and personal credit score summary and score. No credit card required. Easy to use and valuable insights all in one spot.
    Authorize.Net enables merchants to authorize, settle and manage credit card and electronic check transactions via Web sites, retail stores, mail order/telephone order (MOTO) call centers and mobile devices.
  • Fundera
    Fundera is the safe, friendly, and free way to find your lowest rates on small business loans, guaranteed.
  • Kabbage
    Kabbage gives you the security of working capital whenever you need it.
  • OnDeck
    OnDeck delivers true small business loans using our OnDeck Score technology, which focuses on the health of your business - not your personal credit score. To get the offer, please type MRP-CRP-001 in the form field listed as Partner ID.
  • iDefend Business
    Protect yourself and your business from criminals that steal business identities. Business identity theft not only hurts the company, but also employees, suppliers, and even customers.