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The differences between a business loan and a business line of credit

There are a number of different options available to businesses that need funds. Whether it’s to grow, for cash flow purposes or another reason entirely, it’s important to understand the choices so you can pick a solution that works for you.

Two common options are a business line of credit and a business loan. Here, we explore the ins and outs of both.

How a business line of credit works

Once you have been approved to access a line of credit, you can draw down part – or all – of the approved funds during the term of the facility, which is usually 12 months. It’s like a safety net.

You can pay back the money you have accessed at any time, and you only pay interest on the money you have used, for as long as you use it. So if you have a $20,000 line of credit, you can choose to draw down $10,000 one week and repay the money the following week. You will only accrue interest on the money you have accessed.

A business line of credit is perfect for managing fluctuations in cash flow, covering unpaid invoices or buying urgent stock, among other uses.

How a business loan works

In contrast, a business loan is a lump sum amount that you receive on the day the loan term begins. A business loan comes with a schedule of regular repayments, and there may be restrictions on whether the full amount can be paid back early. Typically, you will need to pay interest on the full value of the loan over the term of its life.

However, a business loan could be the ideal solution for you in a number of circumstances. Maybe you have a sizeable one-off expense – like a business renovation or office refit – that needs to be paid in one go. With a small business loan, you can cover the expense, and repay it over a period of time without affecting cash flow.

Because business loans are usually available for larger amounts than a business line of credit, they are also useful for buying capital items like plant and equipment.

The bottom line

If your business needs funds for opportunity, growth or cash flow support, a business loan or a business line of credit could be the answer. But it’s important to do your homework, explore your options and decide on the best finance solution for your needs.

Our small business lending specialists are here to help. Find out more about Prospa’s different financing options or contact us on 1300 882 867.

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The information in this post is provided for general information only and does not take into account your personal situation. Nothing contained in this post constitutes advice or an endorsement or recommendation of any kind by Prospa. Any links to third party websites are strictly for informational purposes only. You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice from financial, legal and taxation advisors. Although every effort has been made to verify the accuracy of the information as at the date of publication, Prospa, its officers, employees and agents disclaim all liability (except for any liability which by law cannot be excluded), for any error, inaccuracy, or omission from the information for any reason, including due to the passage of time, or any loss or damage suffered by any person directly or indirectly through relying on this information.

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