Business Line of Credit vs Commercial Loan: Why the Right Financing Solution is a Commercial Loan
6 minute read
June 29, 2023


A business line of credit vs. commercial loan — which is better? 

In the world of business, having access to the right financial resources is crucial for growth and success. However, securing the necessary funds can be a daunting task, requiring entrepreneurs to navigate through a sea of financing options and make difficult decisions. 

Marquee Funding Group has a team of savvy business-minded people who can help. 

Two popular financing solutions are commercial loans and business lines of credit, each with its own set of advantages and disadvantages.

Stay tuned as we delve deeper into the world of commercial loans and business lines of credit, equipping you with the knowledge and insights necessary to make an informed decision when choosing the right financing solution for your business.

Introducing commercial loans and business lines of credit

Commercial loans provide a lump sum of capital upfront, which can be used for a variety of business purposes such as purchasing equipment and real estate or funding a significant expansion project.

Conversely, business lines of credit are revolving credit options that allows businesses to draw funds up to a predetermined limit as needed, giving them more flexibility in managing cash flow.

While both options have their merits, a commercial loan offers several advantages over a business line of credit. 

For instance, commercial loans typically come with lower interest rates, more favorable repayment terms, and a higher borrowing capacity. This makes them an ideal choice for businesses seeking long-term financing solutions for large-scale projects or investments.

Let’s examine this argument in more detail. 

Understanding the benefits of commercial loans

Commercial loans offer numerous advantages for small business owners seeking financing solutions. One of the most significant benefits is the ability to secure long-term and large-scale borrowing options, which can be critical for businesses looking to invest in major projects or expansions.

Flexible repayment options

Additionally, commercial loans often come with flexible repayment schedules, allowing businesses to manage their cash flow more effectively.

Lower interest rates

Another advantage of commercial loans is their typically lower interest rates compared to business lines of credit. This means that businesses can benefit with less costly interest payments over time, freeing up capital for other essential expenses. 

Higher borrowing limits

Furthermore, commercial loans tend to have higher borrowing limits, providing businesses with the financial resources they need to achieve their growth objectives.

Good news for your credit rating

Lastly, securing a commercial loan can also boost your credit rating, making it easier for your business to access additional financing in the future. 

However, the argument between a business line of credit vs commercial loan goes beyond the benefits of the commercial loan. Business lines of credit have some built-in features that could work against your business as well. 

What’s your loan scenario?

Breaking down the risks of business lines of credit

Business lines of credit, though a popular financing option, come with inherent risks that entrepreneurs and business owners must be aware of. 

Over-reliance on available credit

One such risk is over-reliance on credit — something many lenders may encourage you to draw upon whenever you feel necessary. This practice can lead to mounting debt and, eventually, insolvency.

For instance, the downfall of Toys “R” Us can be attributed, in large part, to its excessive debt.

What are you paying, exactly?

Another risk is fluctuating interest rates, as most business lines of credit have variable rates. This feature can make it challenging for businesses to predict their future financial obligations accurately. 

Juggling act

Additionally, misuse or mismanagement of credit lines can result in diminished cash flow, hindering a business’s ability to cover operating costs and potentially leading to bankruptcy.

To safeguard against these risks, businesses should be prudent when utilizing credit lines, ensuring they have a clear plan for repayment and monitoring their outstanding balances regularly, so borrower’s dont draw more than what they need and use of all their credit limit. 

It’s essential to maintain open communication with lenders and be proactive in adjusting credit strategies as needed.

Exploring different types of commercial loans

When seeking financing for your business, it’s essential to explore the various types of commercial loans available, as each offers unique benefits tailored to specific financial needs. 

We briefly discuss some common commercial loan options entrepreneurs can consider.

Secured vs. unsecured commercial loans

Secured loans require collateral, such as property or equipment, which might be seized by the lender in case of default. 

These loans typically come with comparatively lower interest rates because of the reduced risk for the lender. 

On the other hand, an unsecured loan does not require collateral but may have higher interest rates to account for the increased risk.

Long-term vs. short-term loans

Long-term commercial loans are ideal for financing significant investments or projects, such as purchasing real estate or funding a major expansion. These loans often feature lower interest rates and extended repayment terms. 

Long-term loans are often used on borrower’s primary residences, which results in 30 year terms (360 Months). Payments on long term loans, like 30 year consumer loans, decrease the principal balance until it gets to zero.

Short-term loans, conversely, can help businesses address temporary cash flow issues or cover unexpected expenses, offering quicker access to funds and shorter repayment periods.

Short term loans are often 3 years or less and are usually interest only loans. Interest only loans allow borrower’s to solely pay for the interest on the loan and then the balloon payment once the loan comes to maturity.

Small business loan options

Various small business loan programs cater specifically to the needs of smaller enterprises. For example, the Small Business Administration (SBA) offers several loan programs designed to assist small businesses in obtaining financing with favorable terms and conditions.

One notable limitation to SBA loans is the lengthy and complex application process, which may require extensive documentation, along with strict eligibility criteria, making it difficult for some businesses to qualify. 

Furthermore, since SBA loans are partially guaranteed by the government, they may impose specific usage restrictions on the borrowed funds, limiting a business’s flexibility in allocating resources. This makes them more of a hassle than a standard hard money loan, which does not have the same restrictions and limitations. Loan terms are negotiated between the investor and the hard money lender. 

Business line of credit vs commercial loans — the bottom line

With the diverse range of options and the numerous benefits they offer, commercial loans often prove to be a more advantageous choice compared to business lines of credit.

Furthermore, as a trusted financial partner, Marquee Funding Group offers a wide range of commercial loan products tailored to meet the unique needs of businesses across various industries.

Hard money lending solutions

Hard money lending serves as an optimal solution for a variety of borrowers, such as small business owners, self-employed individuals, property renovators, real estate investors, or anyone who may face challenges in demonstrating their eligibility to conventional lenders.

Submit your loan scenario to Marquee Funding Group today.

Our versatile and pragmatic approach to hard money lending enables us to assist you in discovering a suitable solution, tailored to your distinct borrowing needs.

Photo by Charles Parker

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