SBA Loan Vs. Line of Credit: Which Is Right for Your Business?

If you’re looking for financing for your small business, you probably know that there are many options for you to consider.

You might be struggling with which to choose, and that’s why we’re here to help.

If you’re grappling between an SBA loan vs. line of credit—you’ve come to the right place.

SBA Loan Vs. Line of Credit: A Deep Dive

Before diving into which financing option might be best for your business, we’ll break down each of these excellent loan products.

Read on to explore what they are, what you need to qualify, plus the pros and cons of each.

What Is an SBA Loan?

First up in the SBA loan vs. line of credit debate: SBA loans.

An SBA loan is a long-term, low-interest small business term loan partially guaranteed by the government.

Note that the U.S. Small Business Administration does not administer the loans themselves. Rather, an accredited bank provides the loan under the pretense that the loan is backed by the SBA.  

This means the bank incurs less risk in lending SBA loans, meaning it is more likely to get approved (but certainly not easy to qualify for).

The SBA loan programs let you borrow money for nearly any business purpose—including adding to working capital, purchasing inventory or equipment, refinancing other debts, buying real estate, or even funding the acquisition of other businesses.

What Do I Need to Qualify?

Various factors contribute to qualifying for an SBA loan, but these are the general requirements:

• At least 2 years in business
• At least a 620 credit score
• At least $100,000 in annual revenue

What You Need to Know

Here’s what an SBA Loan can get you:

• Maximum loan amount: $5,000-$5 million
• Loan term: 5-25 years
• Interest rates: Starting at 6.5%
• Access to capital: As little as 3 weeks

How Do I Apply?

Many large and local banks offer SBA loans, but for an easier and quicker process, you can apply online.

Benefits of an SBA Loan

Here’s why you’d want to go with an SBA loan vs. line of credit:

• SBA loans consist of some of the lowest down payments on the market.
• They have some of the longest payment terms—meaning lower monthly payments over a longer period of time.
• SBA loans have very reasonable interest rates—some of the best on the market.
• The interest rates are also stable—once you qualify for a certain rate with a term loan, it’s guaranteed through the life of the loan.
• SBA loans are suitable for a wide range of business purposes.

Downsides of an SBA Loan

Here’s why you might want to skip out on an SBA Loan:

• The application process can be very complicated, with lengthy paperwork. If you need cash fast, this may not be the route to go.
• Additionally, it will take longer to get approved for your loan.
• SBA loans often require collateral, which isn’t a fit for every business.
• Closing costs and interest rates for term loans are typically higher.
• Typically requires a strong credit score.
• Once you use up all the loan funds, you’ll need to reapply for a new loan to gain more access to capital, which can be quite a hassle.

So, what does the other side look like?

What Is a Business Line of Credit?

Next in the SBA loan vs. line of credit debate, we’ll explore business lines of credit.

A business line of credit works a lot like a credit card. You get access to a set amount of financing, but you only make payments and incur interest on the funds you use. Plus, a business line of credit comes in cash—whereas a cash advance from a credit card can be very expensive.

Most lines of credit are “revolving,” which means you can tap into them again and again. As opposed to a term loan, which only gives you a set amount once.

For instance, if you have a $25,000 line of credit and take out $10,000, you still have access to the remaining $15,000 if you need it. Once you make payments on that $10,000 until it is back down to $0, you will have access to the entire $50,000 again without having to reapply for more cash.

What Do I Need to Qualify?

At a minimum, you’ll need:

• To have been in business at least 6 months
• At least $50,000 in annual revenue

What You Need to Know

A business line of credit gives you capital to meet a whole variety of business needs. Draw on your business line of credit to get more working capital, buy inventory, handle seasonal cash flow gaps, pay off other debts, or address almost any other business emergency or opportunity.

• Maximum loan amount: $10,000 to over $1 million
• Loan term: 6 months to 5 years
• Interest rates: 7% to 25%
• Access to capital: As little as 1 day

How Do I Apply?

You can get a traditional line of credit through your bank, but if you do not qualify or need access to a line quickly, you can apply online.

Benefits of a Business Line of Credit

Here’s why a business line of a credit might be a good option for your business:

• A line of credit typically has a lower interest rate and closing costs than a loan of comparable size.
• Lines of credit can be secured or unsecured business loans, meaning you don’t always need to have collateral to secure the loan.
• You only pay interest on the funds you use.
• Business line of credit gives you access to capital whenever you need it (up to a certain amount).
• Business lines of credit are suitable for a wide range of business purposes.
• You don’t always need to have good credit to qualify with certain lenders, particularly online lenders.
• It’s an easy, accessible way to build your credit score.

Downsides of a Business Line of Credit

Here’s why you might not want a business line of credit:

• Interest rates aren’t always stable. If you’re late with a payment or go over your borrowing limit, your interest rate may increase substantially.
• You can get a business line of credit with a low credit score, but the interest rates will be much higher.

SBA Loan vs. Line of Credit: How Do You Choose?

Now that you know exactly what an SBA loan vs. line of credit has to offer—how do you choose?

Term loans are better when you need financing for a very specific purchase. A line of credit is best to have on hand in case of emergency and to give your business some financial breathing room.

Business lines of credit are best for short-term financing needs. You don’t want to tie up your business line of credit paying for long-term investments, or you won’t have access to it in an emergency, limiting your flexibility—which is the whole point of a line of credit.

Working with a company that’s experienced in matching businesses with financing sources can make sure that you find the perfect type of small business loan for you.

What an SBA Loan Is Good For

• Large purchases or investments
• Funding expansion
• Funding a franchise

What a Business Line of Credit Is Good For

• Payroll
• Seasonal expenses
• Emergencies
• Temporary cash flow shortages  

Essentially, you can decide between an SBA loan and a business line of credit based on how much capital you need, what you need it for, and how you intend to use it.

You might even want both to address your long- and short-term financing needs.

Once you factor in all of those variables, see what you qualify for and go from there. You might want to work with an experienced small business loan professional who can help you make the right decision. Whatever you do, be sure to compare rates between many different companies.

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