So you’re thinking about taking out a business loan but you’re not sure whether you need a traditional business loan or a business equity line? The first step towards answering that question is in understanding the differences between a business loan and a business equity line of credit.

With a business loan, you borrow a specified amount of money. You then agree to pay that specified amount at an agreed upon interest rate over a set period of time in set monthly installments. The funds from the loan are given to you in one lump sum (the principal of the loan) and as you pay the monthly payments, the balance on the loan goes down.

Unlike a regular business loan, a business equity line requires collateral. With a business equity line, you are taking out a loan against the equity in your business property or your home. Therefore, your home or your business property acts as collateral for the loan.

When you take out the equity line of credit, you do not have to take all of the funds at once. You take what you need as you need it. The concept is similar to that of a credit card. The more money you take out of the equity line, the less money you have available to you. The more money you pay back towards the equity line, the more money you have available in your line of credit.

Many banks will require a minimum withdrawal amount each time you take out funds from your equity line of credit. This amount can vary from a few hundred dollars to a few thousand dollars each time you withdraw from the line of credit.

With a traditional business loan, the amount of your monthly payments stays the same. With a business equity line, the amount of your payments fluctuates. The more money you take out of the equity line, the higher your monthly payments will be. The less money you have outstanding, the lower your monthly payments.

The downside to a business equity loan is that if you cannot make the monthly payments, you can lose your property since that is what is acting as collateral to the loan. However, interest rates on a business equity line are usually lower, making the payments easier to handle.

If you are considering taking out a business equity line rather than a traditional business loan, make sure that you will be able to make the monthly payments and you will not need to worry about putting your property up as collateral for the loan.