When to Choose a Business Loan vs. a Line of Credit

Introduction: The Right Funding for the Right Situation

Every business owner faces decisions about financing. Whether you’re expanding, managing cash flow, or covering unexpected expenses, choosing the right type of funding is critical.

A business loan and a business line of credit each serve different purposes.

This guide explores when to use a loan vs. a credit line, so you can maximize your funding.

If you’re still unsure after reading, SCG Funding can help you secure the right financing.

When a Business Loan is the Best Choice

A business loan is ideal for large, one-time expenses that have a clear return on investment. You receive a lump sum upfront and repay it in fixed installments.

Use Cases for a Business Loan

1. Expanding Your Business

If you’re opening a new location, remodeling a storefront, or increasing production capacity, a business loan is the best tool. You get the capital needed upfront to invest in growth, and you repay it as the expansion generates revenue.

Example: A retail store secures a working capital loan to lease and furnish a second location.

📌 Related: 6 Reasons Business Owners Need a Loan

2. Purchasing Equipment or Vehicles

When buying expensive machinery, technology, or vehicles, a business loan—especially equipment financing—provides the funding needed while keeping your cash flow intact.

Example: A trucking company needs a new semi-truck but doesn’t want to drain its cash reserves. It finances the truck with an equipment loan that spreads the cost over several years.

📌 Related: Learn More About Equipment Financing

3. Refinancing or Consolidating Debt

If your business carries multiple short-term debts with high interest, consolidating them into a lower-rate term loan can reduce costs and simplify repayments.

Example: A business owner with multiple credit cards and merchant cash advances consolidates them into a single, lower-interest loan.

📌 Related: How to Get Approved for a Business Loan (Even With Low Credit)

4. Investing in a Large Marketing or Inventory Purchase

For businesses making a major investment in marketing, bulk inventory, or product development, a term loan provides a fixed amount of capital to execute the strategy.

Example: A wholesale distributor secures a business loan to stock up on seasonal inventory before demand peaks.

📌 Related: 10 Smart Ways to Use a Small Business Loan for Growth

When a Business Line of Credit is the Best Choice

A business line of credit is perfect for ongoing, short-term, and unexpected expenses. It gives you on-demand access to cash, without requiring you to take out a full loan.

Use Cases for a Business Line of Credit

1. Managing Cash Flow Gaps

Businesses with fluctuating revenue—such as seasonal businesses or those with delayed payments—use credit lines to smooth out cash flow.

Example: A construction contractor waiting on client payments uses a business line of credit to cover payroll and expenses.

📌 Related: Common Myths About Business Loans & Lines of Credit

2. Handling Emergency Expenses

Unexpected costs, such as equipment repairs or supplier price increases, can disrupt operations. A line of credit provides a safety net to address these without financial strain.

Example: A restaurant’s walk-in freezer breaks down. Instead of waiting for a loan approval, the owner withdraws from their credit line and pays for the repair immediately.

3. Purchasing Inventory or Supplies on Short Notice

When suppliers offer discounts for bulk purchases or when inventory sells out faster than expected, a credit line allows businesses to act quickly.

Example: A retail store sees an unexpected surge in demand and uses a credit line to reorder stock before competitors can.

4. Covering Short-Term Marketing or Advertising Campaigns

If you need to scale up advertising for a short-term promotion, a credit line allows you to invest without committing to a fixed loan.

Example: An e-commerce brand runs a paid ad campaign during peak shopping season using a business line of credit.

📌 Related: How Much Business Funding Can You Get? Loan Amounts Explained

Combining a Loan and a Line of Credit

Many businesses use both financing options strategically.

Example of a Hybrid Strategy

• A working capital loan is used for a major expansion.
• A business line of credit is kept open for short-term needs like payroll or inventory.

This approach provides long-term stability with short-term flexibility.

📌 Need guidance? SCG Funding can help you combine financing options to maximize efficiency.

Making the Right Choice

If you need a large sum for a major purchase, a business loan is best.

If you need flexibility for short-term needs, a line of credit is ideal.

If you want the best of both, consider using both strategically.

Still unsure? SCG Funding can help you navigate your options and secure the best financing for your business.

📌 Apply now: Start Your Application