Business Loan vs. Line of Credit: How to Choose the Right Fit for Your Company

When you need financing for your business, two of the most common options are a business loan and a business line of credit. They can both provide working capital, but they work very differently: a loan gives you a lump sum you repay over time, while a line of credit gives you a reusable pool of funds you can draw from as needed (up to a limit). 

Here’s how each option works, what they’re best for, and a simple way to decide.

What a business loan is

A business loan provides an upfront lump sum from a lender that you repay over time with interest. It’s typically best when you have a specific project, investment, or acquisition that needs a defined amount of funding. 

Common strengths

• You can often borrow more with a loan than with a line of credit. 
• You receive the money all at once, which is ideal for big one-time expenses. 

Common trade-offs

• Many business loans typically require collateral (like real estate, inventory, or cash savings). 
• Some loan types are restricted to specific uses (e.g., an equipment loan may be limited to equipment). 

What a business line of credit is

A business line of credit is flexible financing that works similarly to a credit card: you can borrow up to your limit, repay, and borrow again. It’s often used to access working capital to smooth cash flow gaps or cover emergencies and downturns. 

Common strengths

• Can often be used for any business expense. 
• Some lines of credit are unsecured, meaning you may not need physical collateral. 

Common trade-offs

• Lines of credit tend to be smaller than business loans. 
• They can include extra costs like annual fees, draw fees, or inactivity fees. 

Which one should you choose?

A good rule of thumb:

Choose a business loan if…

• You need a significant amount for a major purchase, expansion, or specific project. 
• You want predictable repayment via installments after receiving a lump sum. 

Examples: buying equipment, launching a new location, acquiring another business, large-scale buildout.

Choose a business line of credit if…

• You need ongoing access to working capital as needs pop up. 
• You’re trying to smooth cash flow or keep a backstop for emergencies. 

Examples: inventory cycles, seasonal slow periods, bridging receivables, unexpected repairs, short-term payroll gaps.

Key differences that matter most

• Purpose: Loans are usually tied to a specific purpose, and you’ll often explain that in the application; lines of credit are typically usable for any purpose. 
• How you repay: Loans are installment credit (lump sum → regular installments). Lines of credit are revolving credit (borrow → repay → borrow again). 
• Collateral/guarantees: Loans often require collateral; lines of credit may use tools like a personal guarantee or UCC lien depending on the lender. 
• Qualification: Loans tend to require stronger credentials (good credit, more time in business, more revenue). Lines of credit are often described as easier to qualify for than loans. 

Where to get a business loan or line of credit

You’ll find both options through banks and online lenders. 

• Banks generally have tougher requirements, but often offer lower rates and favorable terms—especially for businesses with multiple years operating and good/excellent credit. 
• Online lenders can be more accessible for newer businesses or owners with fair/bad credit and may fund quickly (sometimes within a day), but can come with higher interest rates. 

A fast decision checklist

Pick the option that best matches these answers:

1. Do I need one big lump sum (loan) or flexible access (line of credit)? 
2. Is this for a defined project (loan) or ongoing operating needs (line of credit)? 
3. Can I pledge collateral or accept a guarantee/lien if required? 
4. Do I want fixed-style installments (loan) or revolving access with possible fees (line of credit)?