Key Insights at a Glance
- A business loan acts as a lump-sum injection to kickstart or scale your venture
- Lines of credit provide flexible, revolving funds ideal for short-term cash flow needs
- Term loans and credit lines are offered by banks, online lenders, and community development financial institutions (CDFIs)
Small enterprises often lean on business loans to fuel strategic investments that accelerate expansion. Among the financial tools available, term loans and lines of credit stand out as the most popular choices for funding business growth.
Per the Federal Reserve’s 2025 Report on Employer Firms, nearly 40% of employer-based businesses applied for a business line of credit, while 33% pursued a traditional business loan.
Approval rates skew favorably for credit lines, with roughly 73% greenlit, compared to 65% of loan applications receiving the nod.
Though the funds from both options can overlap in usage, deciding factors like loan amounts, interest structures, and the ability to reuse credit dictate which path is the most practical for your needs. Let’s unpack the key traits of business loans versus lines of credit to give you a clearer picture.
What Exactly Is a Business Loan?
Essentially, a business loan is a binding agreement wherein a lender extends capital to a company, which promises repayment under agreed terms. These funds are typically earmarked to grow operations, acquire assets, or launch new products and services faster than relying solely on organic profits.
Understanding the Mechanics of Business Loans
When you secure a business loan, the cash is handed over upfront to cover expenses or investments, with the understanding that you’ll pay it back with added interest and fees. Interest rates might be fixed, maintaining a steady cost throughout the loan term, or variable, fluctuating with market conditions.
Most lenders stipulate a repayment period—anywhere from half a year to a decade—tailored to eligibility and loan type, referred to as the repayment term.
Getting to Know Business Lines of Credit
A business line of credit grants a borrowing limit you can tap into repeatedly, up to a set ceiling imposed by the lender. This revolving credit is perfect for patching unexpected cash flow gaps or routine expenses.
How Do Lines of Credit Function?
Interest begins accruing only after you withdraw funds, with repayments typically due weekly or monthly. Short-term lines last from six months up to two years, whereas long-term credit lines may extend five years or more. Your credit availability rebounds as you repay, letting you draw again as needed.
Many lenders sweeten the deal by offering hefty credit limits, extended repayment windows, and convenient approval processes. Additionally, lines of credit often come with more forgiving eligibility criteria—sometimes accepting personal credit scores as low as 600—compared to traditional loans.
Business Loans vs. Lines of Credit: A Side-By-Side Comparison
| Interest Rates | 6% to 45% | 8% to 60% |
| Interest Charged On | Full loan amount | Only drawn funds |
| Repayment Terms | 2 to 10 years | 6 to 24 months (online lenders), 2+ years (banks) |
| Repayment Schedule | Generally monthly | Weekly or monthly, starting upon withdrawal |
| Getting New Funds | Requires a new application | Draw funds anytime within credit limit |
Loans deliver a lump sum to your business upfront, triggering immediate repayment obligations even if you don’t spend the entire amount right away. Business term loans often have heftier sums and longer payback periods compared to lines of credit.
By contrast, a line of credit offers the freedom to pull funds on demand, paying interest only on what you borrow without needing to specify the purpose when you draw. Though credit limits may be modest—often capped around $250,000—lines of credit frequently welcome startups or firms with shaky credit backgrounds.
When to Opt for a Business Loan
- You require a sizeable sum for a specified purchase
- Loan amounts north of $500,000 are needed
- You prefer fixed repayment schedules with a clear payoff date
- You don’t anticipate needing further credit access after this loan
When a Business Line of Credit Is the Smarter Play
- You want flexible access to funds as business demands fluctuate
- Ongoing or future purchases necessitate revolving credit
- Small expenses or bridging cash flow hiccups
- Interest payments limited to drawn amounts
- Limited eligibility for conventional loans makes lines more attainable
Where to Score Business Loans and Credit Lines
Whether from stalwart banks, nimble online lenders, or mission-driven community lenders, the loan landscape covers a variety of options—each with its own perks and quirks. Traditional banks bring personal service and lower rates but enforce tight credit criteria. Online lenders dispense quicker approvals and lower barriers but typically with shorter terms and steeper interest.
Banks
Most brick-and-mortar banks extend both term loans and lines of credit, sometimes secured to help build credit. Yet, they often require a credit score hovering above 670 and annual revenues near $200,000. Though lines of credit may have slightly relaxed standards, their thresholds remain lofty relative to other providers.
Bank of America
BoA shines in line of credit offerings, featuring unsecured lines starting at $10,000 with no draw fees, plus secured options requiring $250,000 in yearly revenue. Startups with half a year in business can qualify for a credit-builder line with a $1,000 deposit.
Wells Fargo
This bank specializes in business lines of credit tailored to different growth phases, including SBA-backed options, unsecured credit for most businesses, and secured lines for firms with $2 million+ revenue. A minimum personal credit score of 680 is essential for approval.
Capital One
Capital One goes big, offering credit lines up to $5 million, far beyond the $250,000 standard. However, it demands two years in business and a linked Capital One checking account.
Online Lenders
Online finance providers tend to speed up approvals and ease qualification rules, making them a natural fit for startups or those with spotty credit histories. Usually, their focus is on short-term financing, often with higher interest rates than banks.
Bluevine
Bluevine offers competitive business lines of credit starting at a 7.8% simple interest rate—remarkably close to bank rates. Qualification requires a 625 FICO score and $10,000 monthly revenue, or more stringent criteria for longer repayment plans.
Credibly
Offering short-term loans, lines of credit, and merchant cash advances, Credibly funds up to $600,000 with repayment periods up to 24 months. Beware that some loans use factor rates, multiplying fees significantly compared to traditional interest rates.
Community Development Financial Institutions (CDFIs)
CDFIs exist to support underserved entrepreneurs who don’t fit conventional lending molds. They accept businesses with lower revenues or damaged credit histories, often providing access where others won’t.
Lendistry
With a variety of loan products including SBA loans and special term loans for low-income businesses, Lendistry’s minimum loan size starts at $25,000, which may limit options for smaller needs.
Accion Opportunity Fund
This lender targets underserved areas, offering loans beginning at 8.49% simple interest. However, it doesn’t provide lines of credit, narrowing its utility for some borrowers.
Alternatives to Conventional Financing
Sometimes, traditional loans or credit lines are out of reach or ill-suited to your business. In these cases, consider options like:
- Business Grants: Non-repayable funds awarded competitively. You’ll usually need to demonstrate how your venture stands out or serves underserved communities.
- Crowdfunding: Raising capital from individual backers rather than institutions, often bypassing strict credit and revenue requirements. Repayment terms and interest vary.
- Invoice Factoring: Sell your outstanding invoices to a lender for immediate cash, with repayments often set aggressively as daily or weekly deductions from sales.
Choosing between a business loan and a line of credit often boils down to whether you want a one-time injection with a set repayment timeline or ongoing access to funds for variable expenses. Term loans are embraced for large, singular investments; credit lines excel at smoothing cash flow and handling unpredictable needs.
Frequently Asked Questions
Is it easier to get a business loan or a line of credit?
Lines of credit generally have friendlier approval thresholds, like lower credit score requirements. Still, the final say depends on each lender’s standards and policies.
What credit score do I need for a business line of credit?
Typically, a personal credit score around 600 suffices for online lenders. Traditional banks and credit unions usually mandate 670 or above.
Why do some businesses prefer lines of credit over bank loans?
The allure of repeated borrowing is key. Once approved, firms can access funds as needed up to their limit, making credit lines versatile and responsive to fluctuating funding demands.