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Tata Capital > Blog > Loan for Business > Business Loan VS Lines of Credit: Everything You Need to Know

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Business Loan VS Lines of Credit: Everything You Need to Know

Business Loan VS Lines of Credit: Everything You Need to Know

Starting a venture and watching it grow is one of the most satisfying things ever. However, entrepreneurs are often forced to give up their dreams due to lack of funds. While some may opt for borrowing from relatives, others choose to take a loan for business or go for a line of credit.

You'd often hear entrepreneurs talk about both being good options to finance business-related expenses, but how are they different from each other and which one should you opt for? The biggest reason why most business owners consider a line of credit is because business loan approvals aren’t really easy. In reality, a business line of credit may have multiple benefits. Let’s dive into the difference between a business loan and the line of credit:

Comparison Points Business Loan Line of Credit
When do you take it? One of the prime differences between a business loan and a line of credit is the time of availing them. A business loan can either be taken before you start your business or midway. The fund thus availed is utilized for meeting business expenses. Line of credit is taken before you start the business as it could be used for any purpose. 
Payment Like any other loan, when you take a loan for business, you’ll have to repay it.  Additionally, loans are obtained for a fixed duration, so you would be, by default locked in. Considering that you’re paying monthly for it regardless of the usage, the total cost of securing a business loan could be higher. Payment on the line of credit is made only on the amount utilized. 
Rate of interest Although the rate of interest on business loans is higher, it’s fixed. So, you know the amount you’re shelling out.  The line of credit is not interest-rate driven and comes with a lower, but variable rate. 
Closing cost Business loans carry with them a higher closing cost, typically between 5-7%. The closing cost of a business line of credit is much lower, and in certain cases, there may be no closing cost at all.

While both business loans and a business line of credit have their pros and cons, the right option depends on the unique needs of your business. Do you need a hefty amount to purchase or upgrade machinery, or would a short-term finance option work better for your situation? It’s best to chalk out the fund expectations and requirements for your business before you decide on the best one for your needs. Contact Tata Capital for the best options when it comes to your financial needs.