No matter how long you’ve had a business, you are always going to need cash flow. For this reason, financing, especially for small businesses, is a crucial factor for growth. In the past, there were very few options for financing, but these days, businesses have multiple options available. Before deciding on any type of financing, it’s important to understand the advantages and disadvantages each one offers. Here’s a look at the difference between a business loan and a business line of credit.

A Business Loan: Pros and Cons

Loans offer businesses a lump sum of money to be paid off in a longer term, typically 2 to 6 years. Businesses apply for a loan when they need to it for a specific purpose (i.e. opening a new store) then make fixed payments month by month till all the money has been repaid, regardless of whether or not they are using the money.

Since loans are fixed, monthly payments and closing costs tend to be higher for loans than for lines of credit

Business Line of Credit: Pros and Cons

Business credit lines, on the other hand, offer companies a smaller, renewable source of capital. A line of credit only needs to be paid on when the money is being used, much like a consumer credit card. This means business lines of credit are based on short term funding needs. A business usually sets one up ahead of time, just in case they need extra capital at some point, such as a funding daily operations during a low demand cycle.

Credit lines are likely to be subject to variable rates. If any payments are late, the interest rate will increase whereas managing the credit line well may garner lower rates.

Business loans and business credit lines can both be excellent funding options, but which one you choose depends predominantly on your company. Financing decisions can be difficult, after all, it’s your entire business riding on the decision. Knowing how two different options compare, however, will help you decide which one will ultimately serve your business needs better.