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Loans vs. Credit Lines: What’s Right For Your Business?

You need cash for your business in order to function. There are many options out there for financing your business goals, including business lines of credit and business loans, but the best option will depend on various factors. Whether you’re running an established venture or nurturing a startup, understanding the difference between a business loan and a line of credit can be a decent compass for selecting the option that is right for your business. 

So, let’s start by shedding light on these two popular financial options. 

What are Business Loans?

A business loan is basically a lump sum of money that you receive. In return for that money, you commit to repaying it over time, with interest, until the term is complete. Depending on the lender, these loans can range from a few months to 25 years. 

The loan amount typically stretches up to $500,000, but some lenders may open the gates to as much as $5 million. Business loans are chameleons, adaptable to various purposes: expanding your business, stocking up on inventory or equipment, or simply covering those everyday operating expenses. You can use business loans for any of these things or all of them. However, some lenders may insist that you specify the loan’s purpose when applying.

Interest rates, also known as annual percentage rates (APRs), typically range between 4% to 7% for traditional banks, while online lenders may have rates ranging from 11% to 44%.  Also keep in mind that some lenders will charge an origination fee, which is usually around 3-5% of the loan amount. Always read the fine print before you sign the loan contract.

What are Business Lines of Credit?

Now, let’s shift to the less understood business line of credit, also called a revolving credit line. Unlike business loans, a line of credit allows you to take portions of the credit line available. In other words, if you have a line of credit that is $5,000, you may decide to use only $1,000 one month. You will only be charged interest on the $1,000, not the full $5,000, until you paid it all back. Then, you are free to use however much or little of the $5,000 next time you need something.

These credit lines often come with limits ranging from $2,000 to $250,000, but the amount ultimately depends on the lender and your eligibility.

Depending on your creditworthiness, you will find that your line of credit may have an APR between 10% to 40%, sometimes even higher. 

The Pros and Cons of Business Loans 

When looking at business term loans vs lines of credit in New Jersey, it is important to weigh the advantages. Business loans, obtainable through both traditional banks and online lenders, have many benefits, as well as some downsides. 

Pros of Business Loans

  • Versatile Funds:
    • Can be used for a myriad of purposes, though often specified during the application.
  • Lower Interest Rates:
    • Typically flaunt lower interest rates compared to business lines of credit.
  • Predictable Repayment:
    • Fixed rates and equal monthly payments make budgeting a breeze.
  • Extended Terms:
    • Repayment terms can stretch up to 25 years, resulting in lower monthly payments.
  • Debt Consolidation:
    • If you find yourself juggling multiple high-interest debts, such as credit card balances or other loans, a business loan can help you consolidate them into one manageable monthly payment with a lower interest rate.
  • Expansion and Growth:
    • Perhaps you’ve been eyeing that adjacent storefront or planning to open a new location. A business loan can provide the necessary funds to seize growth opportunities.

Cons of Business Loans

  • Collateral Demands:
    • May require collateral, such as property or equipment, to secure the loan.
  • Rigid Repayment:
    • Repayment schedules can be unbending, with missed or late payments leading to additional fees.
  • Personal Guarantees:
    • A personal guarantee might be necessary, putting you on the hook for repayment even if the business falters.

The Pros and Cons of Business Lines of Credit

Now take a look at how lines of credit compare to loans. You will find that lines of credit provide more flexibility but may lead to higher interest payments. 

Pros of Business Lines of Credit

  • Flexible Usage:
    • Borrowers can use funds for most business purposes without disclosing the specific use case during the application.
  • On-Demand Access:
    • Provides business owners with funds based on cash flow needs.
  • Interest on Usage:
    • You only pay interest on the portion of the credit line in use.
  • Building Business Credit:
    • Responsible use of a business line of credit can help you establish and improve your business credit score. This, in turn, can open doors to better financing options in the future.
  • Seasonal Support:
    • If your business experiences seasonal fluctuations, a line of credit can help you navigate the highs and lows. Draw on the credit line during busy periods and repay it during slower times.

Cons of Business Lines of Credit

  • Higher Interest Rates:
    • APRs are often higher than business loans, depending on your creditworthiness.
  • Temptation and Debt:
    • Lines of credit can lead to overspending or a cycle of borrowing.
  • Lower Borrowing Limits:
    • Borrowing limits tend to be lower compared to business loans.

The Application Process: Business Loans vs. Lines of Credit

One of the key differences between business loans and lines of credit lies in the application process. Let’s explore how these processes unfold and what you can expect:

Business Loan Application

The application process for a business loan is often more extensive and rigorous compared to a line of credit. Lenders want to ensure that you have the financial stability and repayment capacity to handle the loan. Here are the typical steps involved:

  • Preparation:
    • Before applying, gather essential documents such as financial statements, tax returns, business plans, and credit reports. Having these ready will streamline the process.
  • Choose a Lender:
    • Research different lenders, including traditional banks, credit unions, and online lenders, to find the one that suits your needs. For example, New Bridge Merchant Capital has a variety of term loans and MCAs to help your business thrive. 
  • Application Submission:
    • Complete the lender’s application form, providing detailed information about your business, the loan amount requested, and its purpose.
  • Documentation:
    • Prepare to submit various documents to support your application, including financial statements, tax returns, bank statements, and business plans.
  • Underwriting:
    • Lenders will conduct a thorough review of your application and supporting documents. They’ll assess your creditworthiness, business financials, and repayment capacity.
  • Approval and Terms:
    • If your application is approved, you’ll receive an offer outlining the loan amount, interest rate, repayment terms, and any applicable fees.
  • Collateral:
    • In some cases, lenders may require collateral to secure the loan. This could be business assets, real estate, or personal assets, depending on the loan type and amount.
  • Closing:
    • Once you accept the loan offer, the lender will finalize the loan agreement, and the funds will be disbursed to your business account.
  • Repayment:
    • You’ll begin making regular monthly payments according to the agreed-upon terms.

Business Line of Credit Application

The application process for a business line of credit tends to be more streamlined and less complex than that of a business loan. Lenders place greater emphasis on your creditworthiness and cash flow. Here’s what the application process for a line of credit typically involves:

  • Preparation:
    • Gather essential documents, including business financials, bank statements, and your credit report. Ensure your business and personal finances are in good order.
  • Lender Selection:
    • Research and choose a lender that offers the type of line of credit you need, whether it’s a traditional bank, credit union, or online lender.
  • Application Submission:
    • Complete the lender’s line of credit application, which will include details about your business, requested credit limit, and intended use.
  • Credit Check:
    • Lenders will perform a credit check to assess your creditworthiness. Your personal and business credit scores play a significant role in the approval process.
  • Approval and Terms:
    • If approved, you’ll receive an offer outlining your credit limit, interest rate, and other terms. These terms may vary based on your creditworthiness.
  • Acceptance:
    • Review the offer carefully, and if it meets your needs, accept the line of credit.
  • Accessing Funds:
    • Once you’ve accepted the offer, you can access funds as needed, up to the approved credit limit. Some lenders provide checks, while others offer online access.
  • Repayment:
    • You’ll make monthly payments based on the outstanding balance, plus interest. The minimum monthly payment is typically a percentage of the outstanding balance.
  • Renewal:
    • Lines of credit often have a draw period, during which you can access funds, followed by a repayment period. You can often renew the line of credit after the draw period ends.

What Credit Score is Required For a Business Term Loan or Line of Credit?

The business credit score requirements for a business term loan and a business line of credit can vary depending on the lender and the specific loan program. However, here are some general guidelines to consider:

Business Term Loan

For traditional business term loans from banks and established financial institutions, a strong credit score is typically required. A credit score of 680 or higher is often a minimum requirement, but some lenders may require even higher scores, especially for larger loan amounts. Lenders will also assess your business’s credit history. Ideally, there should be no significant negative marks on your record. For new businesses, this can be one of the challenges of securing a business loan, because you may not have enough history to prove creditworthiness. 

Business Line of Credit

Business lines of credit can be more flexible in terms of credit score requirements compared to term loans. While some lenders may still prefer higher credit scores (around 680 or higher), there are alternative and online lenders that may approve lines of credit for businesses with credit scores as low as 600 or even lower. If you do not have an extensive business or personal credit history, this may be the better choice. Lenders will be more forgiving of a short history or minor credit issues, particularly if your overall financial situation is strong. 

Loans vs. Lines of Credit: A Look at Interest Rates and Fees

Understanding the costs associated with business loans and lines of credit is crucial for making informed financial decisions. Both financing options come with interest rates and potential fees. Your business, including its profits and age and even its business credit score, will impact the amount you must pay from interest and other applicable fees. 

Interest Rates

Interest rates are a significant factor in the cost of borrowing. Here’s how interest rates work for each type of financing:

Business Loans

Business loan interest rates can be either fixed or variable. Fixed rates remain constant throughout the loan term, providing predictability in your monthly payments. Variable rates, on the other hand, can fluctuate based on market conditions. The rate you receive depends on factors like your creditworthiness, the loan term, and the lender’s policies. Typically, business loan rates offered by traditional banks tend to be lower than those from online lenders.

Lines of Credit

Line of credit interest rates are often variable and tied to a benchmark rate, such as the prime rate. Your creditworthiness plays a significant role in determining your interest rate. While lines of credit may have higher rates compared to business loans, you only pay interest on the amount you’ve borrowed. This flexibility can make lines of credit cost-effective when used wisely.


In addition to interest rates, both business loans and lines of credit may come with various fees. There are some common fees that are associated with each type of loan. Let’s take a look. 

Fees associated with business loans may include:

  • Origination Fees:
    • Some lenders charge an origination fee, typically as a percentage of the loan amount. This fee covers the cost of processing your application and funding the loan.
  • Application Fees:
    • Some lenders may require an upfront application fee when you submit your loan application.
  • Prepayment Penalties:
    • Certain loans may come with prepayment penalties if you repay the loan before the agreed-upon term. Be aware of these penalties and their impact on your overall cost.
  • Late Payment Fees:
    • Missing a loan payment may result in late payment fees, adding to your borrowing cost.

The fees associated with lines of credit may include:

  • Draw Fees:
    • Some lenders charge a fee each time you access funds from your line of credit. It’s important to consider these fees when deciding how much to borrow and how often.
  • Inactivity Fees:
    • If you don’t use your line of credit for an extended period, some lenders may charge inactivity fees.
  • Annual Fees:
    • Some lines of credit may come with an annual fee, similar to a credit card annual fee. Be sure to factor this cost into your financial planning.

Understanding these interest rates and fees is crucial for comparing the total cost of different financing options. When evaluating lenders, request a clear breakdown of all associated costs to make an informed decision.

Choosing Between a Line of Credit and Business Loan in New Jersey

Now that you know a bit more about business lines of credit and term loans, it is time to ask yourself which one is right for your business. Let’s break down some scenarios when one of these options may be the better choice: 

  • Size of Investment:
    • If your SMB is looking to make a substantial investment, such as expanding facilities, purchasing equipment, or acquiring real estate, a business loan provides the necessary funding to realize these ambitions.
  • Asset Acquisition:
    • If your industry, like manufacturing or technology, relies heavily on equipment or machinery, a business loan can be an efficient way to acquire these assets.
  • Operating Expenses and Cash Flow:
    • If your business faces fluctuating cash flow due to seasonal demands or unexpected expenses, a line of credit can help you bridge those gaps without the rigidity of a fixed loan term.
  • Continuous Access:
    • Lines of credit are revolving, meaning that as you repay borrowed amounts, your credit line replenishes. This feature is valuable for businesses in industries with ongoing needs, such as retail or hospitality.
  • Fixed-Term Goals:
    • Business loans come with fixed repayment terms, which can span from several months to years, depending on your lender and the size of the loan. If your plans align with a well-defined timeline, a business loan’s structured payments can be an advantage.
  • Short-Term Needs:
    • For SMBs with short-term financial needs, such as managing payroll, covering utilities, or seizing immediate opportunities, a line of credit can provide rapid access to funds.
  • Continuous Access:
    • Lines of credit are revolving, meaning that as you repay borrowed amounts, your credit line replenishes. This feature is valuable for businesses in industries with ongoing needs, such as retail or hospitality.
  • Available APRs:
    • Compare the interest rates (APRs) offered by different lenders for both business loans and lines of credit. While rates can vary widely based on factors such as your creditworthiness, it’s important to seek competitive rates to minimize borrowing costs.

Looking for Flexible NJ Loans For Small Businesses?

Navigating the world of business financing can be a daunting task, but armed with knowledge and a clear understanding of your business’s financial needs, you can make informed decisions. Whether you choose a business loan or a line of credit, remember that these financial tools are designed to help your business grow and thrive. Take the time to explore your options, compare offers from different lenders, and choose the path that aligns best with your vision for your business.

Ready to secure the funding your business needs? Contact New Bridge Merchant Capital today and explore our tailored lines of credit and small business loans in New Jersey. Let’s fuel your business growth together.

Work With a Leading Commercial Lender

At NewBridge Capital Solutions, our loan products can help businesses of all sizes. With our exceptional customer service and reputable funding, we have become a trusted leader in the commercial finance industry. If you want to apply for a term loan that can provide working capital for your business, make sure to contact us.
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