Two common financing choices available to businesses are a business line of credit and a small business loan. While these may seem similar, there are significant differences between them.
A business line of credit is similar to a credit card. It provides you with a predetermined credit limit that you can draw upon whenever needed. You only pay interest on the amount you use, and once you repay what you’ve borrowed, the credit typically becomes available again.
On the other hand, a small business loan is a lump sum amount that you borrow from a lender. You receive the entire loan upfront and repay it over a fixed term with interest. Unlike a line of credit, once you repay the loan, you usually cannot borrow from it again unless you apply for a new loan.
Pros and Cons of a Business Line of Credit
One of the main benefits of a business line of credit is flexibility. For example, you have access to funds whenever you need them, making it ideal for managing cash flow fluctuations or unexpected expenses. Additionally, you only pay interest on the amount you use, which can save you money in the long run.
However, there are also downsides to a line of credit.
The interest rates are typically higher than those of a small business loan, making it more expensive to borrow funds. Additionally, there may be annual fees or maintenance fees associated with a line of credit, further increasing the cost. Lastly, qualifying for a line of credit can be more challenging than obtaining a small business loan, as lenders often require a strong credit history and financial stability.
Pros and Cons of a Business Loan
There are many small business loan benefits that you should know about. One significant advantage is the lower interest rates compared to a line of credit. This can result in substantial savings over the life of the loan. Additionally, the repayment terms are fixed, allowing for easier budgeting and planning.
However, a small business loan may not provide the same level of flexibility as a line of credit. Once you receive the loan amount, you are obligated to repay it on a fixed schedule, regardless of whether you need the full amount immediately. Moreover, the application process for a small business loan can be more time-consuming, requiring extensive documentation and financial statements.
Factors to Consider When Choosing Between the Two
1. Your Business’s Specific Need
If you require ongoing access to funds and flexibility, a line of credit may be more suitable. However, if you have a specific project or investment in mind, a small business loan might be the better option.
2. Your Business’s Financial Health
Lenders typically require a strong credit history and financial stability for a line of credit. If your credit score is not ideal or your business is relatively new, a small business loan may be easier to obtain.
3. The Costs Involved
Consider the interest rates, fees, and repayment terms for both options. Calculate the total cost of borrowing for each and determine which option aligns best with your budget.
Secured vs Unsecured Business Loans and Lines of Credit
Both business loans and lines of credit can be secured or unsecured. So, what’s the difference? Well, Secured loans require business collateral, which acts as security for the lender in case of default. Unsecured loans, on the other hand, do not require collateral and are typically based on the creditworthiness of the borrower.
Secured loan options are typically easier to obtain and come with lower interest rates. Secured loan amounts can also be higher. However, there is always a risk of losing collateral with a secured loan or line of credit.
Credit Card Cash Advance
Any company with a business credit card in Canada may consider taking a cash advance in an emergency. A cash advance is essentially borrowing against your business credit card’s available limit. While it can provide immediate funds, it may have consequences for your credit.
When you take a cash advance, it is treated differently than a regular credit card purchase. Interest rates are often higher, and there may be additional fees involved. Moreover, cash advances are typically reported as a separate item on your credit report, which can impact your credit utilization and overall creditworthiness.
Types of Business Loans Available in Canada
In Canada, there are many different types of business loans available to entrepreneurs.
This is a standard loan that provides a lump sum amount upfront, which is then repaid with interest over a predetermined term. This type of loan is suitable for various business purposes, such as expansion, equipment purchase, or working capital.
Such loans are specifically designed to finance the purchase of business equipment. They can have favourable terms, as the equipment itself serves as collateral. If you’re considering applying for a business equipment loan in Canada, please use Levr.ai to explore your options.
Merchant Cash Advance (MCA)
An MCA is a loan that’s based on a slice of your future credit card sales. MCA loans are suitable for businesses that may not qualify for typical loans but have strong sales numbers.
Remember, a merchant cash advance is different from a credit card cash advance. While a credit card cash advance is taken from your business credit card, an MCA is a lump sump of cash in exchange for your future sales.
So, does a cash advance hurt credit? In a nutshell, any type of cash advance can hurt your credit if you don’t meet your repayment responsibilities.
Benefits of a Small Business Loan
A small business loan offers several benefits:
- It provides the necessary capital to invest in growth opportunities, such as expanding your operations, launching new products, or hiring additional staff. With a loan, you can seize these opportunities without depleting your existing cash flow.
- It can help build your business’s credit history. By making timely payments, you demonstrate your ability to manage debt responsibly, improving your creditworthiness for future financing needs.
- It can provide stability and peace of mind. With a fixed repayment schedule, you can plan your budget accordingly and avoid any surprises. This financial stability allows you to focus on growing your business without the constant worry of cash flow challenges.
Exploring Business Credit Card Options in Canada
Business credit cards provide a revolving line of credit that you can use for business expenses. They offer convenience, flexibility, and the ability to earn rewards or cashback on eligible purchases.
When exploring business credit card options in Canada, please consider factors such as interest rates, annual fees, credit limits, and rewards programs. Look for a card that aligns with your business’s needs and offers features that provide value, such as travel benefits or low foreign transaction fees if you frequently conduct business internationally.
Business Equipment Loans: What You Need to Know
If your business requires specialized equipment to operate or expand, a business equipment loan can provide the necessary funds. These loans are specifically designed for purchasing equipment, whether it’s machinery, vehicles, technology, or other essential assets.
When considering a business equipment loan, it’s important to understand:
- The loan amount you need.
- The repayment term that works for your business.
- The interest rate offered.
Please also assess the value and lifespan of the equipment you intend to purchase to ensure it aligns with your business’s needs and growth plans.
How to Qualify for a Small Business Loan in Canada
Qualifying for a small business loan in Canada may seem overwhelming. Conventional lenders will evaluate various factors to determine your eligibility, including your credit score, business plan, financial statements, and collateral. The paperwork can also appear complex. In addition, matching with the right lender can seem challenging.
That’s why we launched Levr.ai. Our platform uses artificial intelligence and machine learning to optimize the process and match applicants with the right lenders. We’ve also streamlined the application process so it’s easier to understand the documentation. Of course, you’re welcome to apply on Levr.ai with your team or your financial adviser.
Here are some more tips to help you apply for a small business loan:
- Have a well-documented business plan that outlines your goals, strategies, and financial projections.
- Maintain a good credit score.
- Prepare the necessary financial statements, including balance sheets, income statements, and cash flow statements.
Some entrepreneurs wonder how to get a small business loan with less-than-ideal credit. Well, some steps may make your application stronger. For example, you can use your personal credit score if it’s stronger than your business credit. You can also offer collateral, which can include business assets, personal assets, or a personal guarantee.
You may also consider applying for a more suitable type of loan, like an MCA, equipment financing, etc.
Choosing the Right Financing Option
Understanding the differences between a business line of credit and a small business loan allows you to make an informed decision based on your specific needs.
Consider factors such as flexibility, interest rates, fees, repayment terms, and eligibility criteria when evaluating your options. Please also explore other financing alternatives such as business credit cards, equipment loans, or invoice financing if they align better with your business’s circumstances.