Business Loan or Line of Credit – Best Financing for Small Businesses

‘Samosa or pasta? Business loan or Line of Credit?’

It is always good to have options, right? Whether it's food or finance, having choices means you can pick what suits you best. But the real struggle begins when you have to choose the best among them. 

You could spend hours weighing the pros and cons, reading endless articles, and still end up confused. Who has the time for all that?

For Example, you own Chai & Vyapaar Café in Mumbai. Business is going good, customers love your tea (gossip), and everything is running like a dream. Until, boom!, your oven explodes. You now need ₹10 lakhs as soon as possible to replace it, or you will face a significant loss.

So, ‘ab kya karenge?’ Do you apply for a business loan or opt for a line of credit?

The answer is not just about money, It is about flexibility, interest rates, and the long-term financial health of your business. ‘Fikr not!’ We are here to provide you with all the information you need to make an informed decision. ‘Chaliye, shuru karte hai’

What is a Business Loan?

Business loan works like any other regular loan. Banks or any other lender offer you a lump-sum amount, and in return, you repay it in fixed EMIs over a set period. The tenure varies anywhere from 6 months to 7 years, depending on the lender and loan type.

Business loans are structured, predictable, and ideal for funding large, one-time expenses, such as purchasing new machinery or expanding your store or café. The best part is that you know exactly how much you’ll owe each month.

Types of Business Loans in 2025 

Read More - Overdraft vs. Personal Loan
 

As we have mentioned earlier, you are living in times where there is a variety of options. You can now choose what works best for you without having to settle for less. We have listed down the main varieties of business loans that you can explore in 2025:

1. Term Loans 

These loans are best for owners who can commit to long-term repayment. If you have a clear, one-time expense in mind, then this is for you. For example, you want to purchase a delivery van or set up a new branch. 

So, instead of going for multiple small loans, you can go for a loan that gives you a bigger amount. You can repay it over time, usually at fixed interest rates, and enjoy the new growth. 

2. SBA Loans 

These as the ‘sarkari’ special loan. These loans are supported by government initiatives like MSME schemes. It means they often come with lower interest rates and favorable terms. However, the paperwork and approval process might take a little longer, ‘sarkari hai na isliye’. It is ideal for small business owners who are looking for affordable funding.

3. NBFC Loans 

NBFC stands for Non-Banking Financial Companies. If you are in a hurry, then NBFCs are for you. These are known for quick disbursals, less strict documentation, and a higher approval rate. 

Even if your credit score isn’t perfect, you are perfectly eligible for this loan. But convenience comes at a cost. The interest rates are higher (typically 12–18%). Still, if you want to save your time, this might be your best option.

In the table given below, we have listed out some bank loans with their respective interest rates.

Source: Bankrate 2025 Small Business Loan Survey

Pros vs. Cons 

Choosing between samosa and pasta, or between a business loan and a line of credit, you have to weigh everything. From the calorie intakes to what your pocket allows, consider everything. So, before you settle for anything, we have listed down the pros and cons of business loans.

Pros: Why a Business Loan Might Be a Smart Move

1️. Predictable EMIs Make Budgeting Easy

One of the biggest advantages of a business loan is that it comes with a fixed EMI structure. The moment you take the loan, you already know how much you’ll be paying every month, which makes financial planning much easier. There are no unexpected increases in monthly payments, and no worrying about fluctuating interest rates. ‘Ek baar deal done, toh done’

2️. High Loan Amounts Give Your Business a Bigger Push

If your business requires a large capital intake, a business loan is perfect for you. It is one of the best ways to secure a significant amount of money at once. Depending on your eligibility, financial health, and the lender’s policies, you can secure a loan of up to ₹10 crore. In some cases, you can get an even higher amount if you have a good repayment history.

For Example, Mansi owns a textile export company and suddenly receives a bulk order worth ₹2 crore. To fulfill it, she needs ₹50 lakh for raw materials and labor. Instead of applying for multiple funding sources, she secures a business loan at 11% interest over 5 years. Her EMI  is of ₹1.08 lakh. This lets her complete the order, earn a ₹30 lakh profit, and grow her business, without touching her existing reserves.

3️. Timely Repayments Can Improve Your Credit Score

You know what happens when you pay your EMIs timely? Your credit scores improve. So, business loans are not only about getting a huge amount of money. You can improve your credit scores while repaying the loan. This way, you will get good deals (lower interest rates) for future loans.

Cons: Why a Business Loan Might Not Be Perfect for You

Also Read - Why Overdraft Loans Are Gaining Popularity
 

1️. Rigid Repayment Terms Can Be Challenging During Slow Business Months

While predictable EMIs make financial planning easier, they can also become a burden if your business goes through fluctuations. For example, you have to pay ₹75,000 EMI, but what if you only made  ₹1,00,000 for that month? How will you afford your basics like rent, groceries, etc? 

2.  Collateral Might Be Required for Lower Interest Rates

If you want lower interest rates, you need to risk something. Banks often ask you to pledge collateral, such as property, equipment, or other business assets.  This means that if you are unable to make your repayments, the bank has the right to seize the collateral to recover its money.

For Example, Ria owns a small manufacturing unit in Pune. She needs ₹30 lakh to expand her factory. Her bank offers her a secured loan at 10% interest for 5 years.  Her total EMI would be around ₹63,740, but only if she pledges her warehouse as collateral.

Unwilling to risk her property, she opts for an unsecured loan at 16%. Now, her EMI is ₹73,034, an extra ₹5.6 lakh in total repayment. Let’s see the table given below for better analysis.

3️. A Hard Inquiry Can Lower Your CIBIL Score

You may not realise that simply applying for a business loan can temporarily impact your credit score. When you apply for a loan, banks perform a hard inquiry to check your financial history. This inquiry is recorded in your credit report and can reduce your CIBIL score by 10–20 points, even if you don’t end up taking the loan.

What is a Line of Credit?

Business is not always smooth. Some months you’re making ₹10–15 lakh, and other times you barely touch ₹3 lakh. In those low phases, a business loan can feel like a burden. The EMIs stay fixed, no matter what your income looks like. And if you miss a payment, you have to pay the hefty penalty fees as well.

That’s where a Line of Credit (LOC) can really help. And no, not that LOC—we’re talking about money, not borders.

A line of credit gives you flexibility. Instead of getting a big amount all at once (like a business loan), you can take out just what you need, when you need it. So whether you’re restocking inventory, covering staff salaries, or fixing a broken machine, LOC has your back.

For Example, Tisha runs a printing business in Delhi. Every few months, paper suppliers offer bulk deals, but only for a short time. Instead of applying for a new loan each time, Tisha uses her ₹20 lakh line of credit.

Last month, she withdrew ₹5 lakh to grab a discount deal. Her interest rate is 14%, so she ends up paying just around ₹5,833 per month in interest (until she repays). Let’s understand better with the table given below:

Types of Lines of Credit in 2025

There’s an LOC for every business type. Whether you're running a cosy home bakery or scaling up your logistics startup, we know your needs will be different. Some might prefer lower collateral, while others might not. In the table given below, we have explained Secured LOC and Unsecured LOC to help you in your decisions.

Pros vs. Cons of a Line of Credit

Pros: Why a Line of Credit is Good For You

1. Pay Interest Only on What You Use
Menka has a ₹20 lakh line of credit, but she only needs ₹4 lakh this month to buy seasonal inventory. Instead of paying interest on the full ₹20 lakh, she will only pay interest on ₹4 lakh. That’s the beauty of an LOC, It is flexible and cost-effective. You borrow what you need, when you need it, and nothing more. 

2. Reusable Funds Without Reapplying
Once you use and repay the borrowed amount, your credit limit resets, and you can use it again. This is exactly like refilling your water bottle. Once you've drunk the water, you can always refill it. This means you don’t have to go through the entire loan application process each time. 

3. No Collateral Required for Smaller Limits
Many lenders now offer unsecured lines of credit, especially for smaller amounts like ₹2–10 lakh. So, even if you're a small business or a sole proprietor, you can access funds without pledging assets. ‘Safe hai, flexible bhi!’

Cons: Why a Line of Credit Might Not Be Perfect for You

1. High Usage Can Hurt Your CIBIL Score
Lenders look at your credit utilization ratio. It is the amount you have borrowed compared to your total credit limit. If you constantly use more than 30% of your LOC (₹6 lakh out of a ₹20 lakh limit), it indicates that you are highly dependent on credits. Over time, this can lower your CIBIL score, making it harder to get loans or credit cards in the future.

2. Variable Interest Rates Mean Less Predictability
Unlike business loans that come with fixed EMIs, LOC interest rates often fluctuate. If the repo rate rises, your LOC rate could jump from 13% to 15%. This increases your monthly payments unexpectedly. This unpredictability can make financial planning difficult, especially for businesses operating on tight margins.

3. Annual Fees Can Add to Your Cost
Some lines of credit come with annual or maintenance fees, typically around 1–2% of your total credit limit. So if you have a ₹10 lakh LOC, you might pay ₹10,000–₹20,000 each year, even if you barely use it. 

Conclusion - Business Loan or LOC

The final answer depends on your business, your goals, and your cash flow. Both business loans and lines of credit have their own place in the financial world.

If you’re looking to fund a big one-time purchase like buying machinery or expanding your café, a business loan is perfect. It is structured, predictable, and designed for large, planned expenses. You know how much you’re borrowing, how much you’ll repay, and when. 

But if your needs are more unpredictable, like staff bonuses or restocking inventory, a line of credit has your back. It is flexible and reusable. 

At the end of the day, the best financial decision is the one that supports your business without stress. So, whether you go for a strong business loan or a smart line of credit, make sure it matches your needs and pocket.

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About the Author

LoansJagat Team

We are a team of writers, editors, and proofreaders with 15+ years of experience in the finance field. We are your personal finance gurus! But, we will explain everything in simplified language. Our aim is to make personal and business finance easier for you. While we help you upgrade your financial knowledge, why don't you read some of our blogs?