If you are starting a business in the new year and you are looking for proper funding, you may have considered a line of credit and a traditional loan. Both of these methods are great ways to fund your business, but they are not the same. Let’s talk about the difference between lines of credit and traditional loans.

What makes a line of credit different from traditional loans

The major difference between a traditional loan in a line of credit is the way that they are paid back. Traditional loans are given as a one-time lump sum, while lines of credit are revolving, similar to credit cards. When you go to pay back a traditional loan, you will have interest and a payment schedule. Lines of credit can be borrowed and repaid as often as you like.

Another way that lines of credit and loans differ is the way that they are given. When you apply for a loan, you must explain what you want the money for, and the money is given based on a specific need from the borrower, such as new equipment or materials. Credit lines can be used for any purpose, and you do not have to justify your desire for a credit line when you apply for one.

Finally, lines of credit and traditional loans differ in the way that interest is accrued and paid. With a traditional loan, interest accrues on the full amount right away, and you start paying interest back on your first payment. For lines of credit, while they have higher interest rates, the interest only accrues when you access the funds.

When it comes to funding a small business, there are many options and each option is beneficial in its own way. If you are looking to fund an equipment purchase or building renovation, you may want to apply for a traditional loan. On the other hand, if you are looking for money for miscellaneous daily purchases, a line of credit may be a better option. Aspen Commercial Lending can help you select the best method of funding for your business.