SBA loan vs. line of credit: What’s the difference and which is better for your business?
If you’re looking for financing for your small business, you probably know that there are many options for you to consider.
You might be struggling with which to choose, and that’s why we’re here to help.
If you’re grappling between an SBA loan vs. line of credit—you’ve come to the right place.
Before diving into which financing option might be best for your business, we’ll break down each of these excellent loan products.
Read on to explore what they are, what you need to qualify, plus the pros and cons of each.
First up in the SBA loan vs. line of credit debate: SBA loans.
An SBA loan is a long-term, low-interest small business term loan partially guaranteed by the government.
Note that the U.S. Small Business Administration does not administer the loans themselves. Rather, an accredited bank provides the loan under the pretense that the loan is backed by the SBA.
This means the bank incurs less risk in lending SBA loans, meaning it is more likely to get approved (but certainly not easy to qualify for).
The SBA loan programs let you borrow money for nearly any business purpose—including adding to working capital, purchasing inventory or equipment, refinancing other debts, buying real estate, or even funding the acquisition of other businesses.
Various factors contribute to qualifying for an SBA loan, but these are the general requirements:
Here’s what an SBA Loan can get you:
Many large and local banks offer SBA loans, but for an easier and quicker process, you can apply online.
Here’s why you’d want to go with an SBA loan vs. line of credit:
Here’s why you might want to skip out on an SBA Loan:
So, what does the other side look like?
Next in the SBA loan vs. line of credit debate, we’ll explore business lines of credit.
A business line of credit works a lot like a credit card. You get access to a set amount of financing, but you only make payments and incur interest on the funds you use. Plus, a business line of credit comes in cash—whereas a cash advance from a credit card can be very expensive.
Most lines of credit are “revolving,” which means you can tap into them again and again. As opposed to a term loan, which only gives you a set amount once.
For instance, if you have a $25,000 line of credit and take out $10,000, you still have access to the remaining $15,000 if you need it. Once you make payments on that $10,000 until it is back down to $0, you will have access to the entire $50,000 again without having to reapply for more cash.
At a minimum, you’ll need:
A business line of credit gives you capital to meet a whole variety of business needs. Draw on your business line of credit to get more working capital, buy inventory, handle seasonal cash flow gaps, pay off other debts, or address almost any other business emergency or opportunity.
You can get a traditional line of credit through your bank, but if you do not qualify or need access to a line quickly, you can apply online.
Here’s why a business line of a credit might be a good option for your business:
Here’s why you might not want a business line of credit:
Now that you know exactly what an SBA loan vs. line of credit has to offer—how do you choose?
Term loans are better when you need financing for a very specific purchase. A line of credit is best to have on hand in case of emergency and to give your business some financial breathing room.
Business lines of credit are best for short-term financing needs. You don’t want to tie up your business line of credit paying for long-term investments, or you won’t have access to it in an emergency, limiting your flexibility—which is the whole point of a line of credit.
Working with a company that’s experienced in matching businesses with financing sources can make sure that you find the perfect type of small business loan for you.
Essentially, you can decide between an SBA loan vs. line of credit based on how much capital you need, what you need it for, and how you intend to use it.
You might even want both to address your long- and short-term financing needs.
Once you factor in all of those variables, see what you qualify for and go from there. You might want to work with an experienced small business loan professional who can help you make the right decision. Whatever you do, be sure to compare rates between many different companies.
Explore Your Business Loan Options