You have a lot of choices when you need to finance working capital. When it comes down to it, though, most of your choices can be boiled down to either a loan, which might be backed by various business assets, or lines of credit. Each has its advantages, which is why it’s worth considering your situation carefully before choosing one for your current financing needs.

Benefits of Credit Lines

Business credit lines can be backed by an asset to keep costs down, just like a loan. They do not have to be, but secured credit lines have the advantage of lower interest rates and higher balance limits compared to unsecured lines offered to an applicant with the same income and credit score.

Beyond that, a line of credit is reusable with no new application as long as you keep paying the balance down. It also typically comes with a short grace period after a withdrawal before interest is assessed. That means if your cash need is just a day or two from your next payout date, you can probably handle the situation without a finance charge.

Benefits of Loans for Working Capital

When you take out a working capital loan, you’re getting a large cash deposit all at once that you can use to manage your cash flow needs, put money into projects, or handle repairs and maintenance issues. Predictable payments with terms structured to give you a comfortable repayment window provide you with the ability to access money for short-term projects and pay it back with the windfall proceeds you make by being ready for surprise opportunities.

You also have the choice between amortizing and interest-only loans, in addition to being able to choose between secured and unsecured loan options. Overall, there are more options you can build into loans than business lines of credit.

Choosing Between Loans and Credit Lines

When you have a need for working capital for a specific project or you have a plan for cyclical use for budget management, there are good reasons to use loans. Their main drawback is the need for approval every time you need financing, but they balance that with customizable rates and terms that help you access capital at the lowest cost possible.

Lines of credit can be cost-controlled but not to the same degree, however they are constant tools you can use to manage cash flow on the fly, as you need to, without having to apply for financing every time you need a small cash advance. Hopefully these differences make it easier to see when each is your best choice.