Small business owners have multiple methods to consider when funding their growing business needs, two of the most well-known methods are small business loans and lines of credit. Both these benefit borrowers in different ways, but some may have an interest in both — is this a possible scenario?
At Michigan Certified Development Corporation, we’re proud to specialize in small business loans for Michigan clients, including numerous services that help our clients apply for and get approved for the loan numbers they need. How do our business loan products compare to lines of credit, can both be carried at once, and what’s the best approach for you here? Let’s take a look.
Small Business Loan and Line of Credit Basics
Here are some basics on both these loan types:
- Small business loan: A small business loan is any loan offered to a small business that has been approved by a financial institution, whether it is an SBA (Small Business Administration) loan or not. This is a lump sum loaned to borrowers for periods ranging widely, from one year in some cases up to 25 years in other cases.
- Line of credit: With a line of credit, on the other hand, borrowers can access funds up to a certain amount, and then pay down the balance over time. These are usually offered without restrictions on how much a borrower can withdrawal (up to the approved amount of the line). But of course, will be subject to interest rates like any other type of loan. This is not an all-or-nothing approach — borrowers can access however much or little they want. Some lines of credit have a borrowing base that will determine the maximum available to draw on the line based on a formula driven by the collateral for the loan (Accounts Receivable, inventory, etc.).
Can You Carry Both Simultaneously?
The answer here is yes, you can. Small business loans and lines of credit are used for different purposes and missions, and diversifying sources is actually viewed positively in many settings. Should you do so, however? This depends on a few other factors.
Choosing Between (Or Both) Options
So which is best for your business: A small business loan, a line of credit, or some combination of both?
The answer here really depends on several factors, most notably your goals for the use of these funds. If your business needs a lump sum of money to start a major project, a small business loan may be the way to go. On the other hand, if you’re looking for an ongoing stream of funds that can be accessed at will, a line of credit might be in order.
In many cases, having both in place makes the most sense. Many businesses have multiple needs that will vary in frequency and duration, so having the flexibility of both types of funding in place makes sense for many businesses.
For more on small business loans and how they compare to business lines of credit, plus whether you can carry both simultaneously, or to learn about any of our Michigan small business loan programs, speak with the staff at Michigan Certified Development Corporation today.