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The Difference Between a Business Loan and a Line of Credit When you need access to funds to help grow your business, you have options. Read on to learn whether a loan or line of credit is best for you.


Borrowing money can be an exciting as well as an intimidating next step in growing your business. With several different financing options available, it's important to evaluate what your goals or specific needs are to choose the most appropriate solution for your business.

Do you think you need a lump sum of money now that you pay back over time? Or do you need to be able to access money at different points over time? Or maybe something different altogether? Here, we'll explore the difference between business loans and lines of credit and how each can help you grow your business.

What is a business loan?

In simple terms, a business loan is a lump sum of cash that owners can borrow from a bank or lender that comes with a prearranged repayment schedule over a fixed period. These loans are best used for specific growth plans that might require more financing. For example, purchasing an office building to house your company.

Business loans also often come with competitive interest rates or flexible financing to cover other costs, such as operating expenses, maintaining inventory, or paying vendors.

While a business loan can offer the entire sum of your loan upfront, "you might be paying interest on funds you're not using," warns Nadine Seivert, Chief Administrative Manager and VP at U.S. Bank. "And, in some cases, these loans are secured against business assets, which means those assets could be at risk if you cannot make the repayments," she adds. So, when choosing the right business loan program, it's important to consider how much money you'll need, how long you'll need it, how long it will take to pay the loan back, and how much collateral you might need to put up for the loan to avoid paying extra interest or putting your assets as risk.

What is a business line of credit?

Business lines of credit, much like traditional credit cards, offer quick and easy access to funds for sudden expenses or cash-flow management needs. Plus, with a line of credit, a business can borrow up to a set limit and they will only be charged interest on the exact amount of money used rather than the total limit.

Lines of credit can be either secured or unsecured depending on the terms of agreement with the lender. Similar to secured loans, a secured line of credit will put a lien against your business assets, whereas an unsecured line of credit won't require you to put up collateral. But an unsecured line of credit may come with higher interest rates or other specific terms to offset potential risks to the lender that arise with issuing an unsecured loan.

"Lines of credit also typically have variable interest rates, which means it may become more difficult to pay back if interest rates increase," Seivert adds. But maintaining payments on your business line of credit can boost your credit score to potentially obtain a larger business loan in the future should you need one.

How to obtain these types of financing.

When deciding whether a loan or line of credit is right for your business, it's necessary to define the parameters of your borrowing needs. "I would recommend a line of credit based on if the business is in need of a solution that can cover the short-term need for injecting cash to the business operating cycle in 12 months or less," Seivert explains. "If the need for cash will take more than 12 months to pay back, I would advise to go with the loan option to benefit from a lower interest rate," she summarizes.

There are several different avenues for you to explore to acquire a business loan or line of credit, mainly through banks or online lenders. "U.S. Bank Business Essentials lending options provide customizable funding solutions and an easy application process for loans," Seivert says. "Plus, business owners can also set up a direct appointment to connect with U.S Bank business bankers to discuss the business loan or line that's right for them."

With competitive loan rates, specialized loan types, and flexible credit lines, small-business owners can take advantage of U.S. Bank's solutions to help readily grow and manage their business with ease.

Click here to learn more about U.S. Bank and how they can help get your business the loan or line of credit it needs.

Credit products are offered by U.S. Bank National Association and subject to credit approval.