Deciding which type of credit is right for your business or your business purpose can sometimes be a challenge. And, in some cases there might be more than one way for a small business owner to access the credit he or she might need. A business credit card, a line of credit, and a small business loan are three very popular ways small business owners borrow the capital they need to fuel growth and fund other business initiatives.
Business Credit Cards
In addition to being a popular way for a business owner to access credit, a business credit card is often easier to qualify for than a traditional small business loan. It’s also a good way to start building a strong business credit profile—making it a good choice for younger businesses trying to establish business credit. Credit cards are also accepted for many common uses providing a convenient and easy way to access credit for your business.
With that said, interest rates on many credit cards are higher than those of a term loan at the bank. There is a correlation between the cost of credit and how easy it is to access, so expect to pay a higher interest rate a credit card than a traditional small business loan. What’s more, approvals are heavily tied to a borrower’s personal credit score, so a less-than-perfect score could make it hard to qualify.
Small Business Loans
Fortunately for most small business owners, there are more loan options available today than ever before and include traditional small business loans available at the local bank, SBA loans, and online business loans. Interest rates and APR will vary depending upon where you get the loan, the loan terms, and how easily, or quickly, you’ll be able to secure the funds.
Qualifying for a term loan can be a challenge for startups and very young companies. Although the SBA loan guarantee program does make loans available to startups (you’ll need a personal credit score of at least 650), most traditional lenders won’t work with a borrower with less than four or five years in business and a credit score of 680 or better. Many online lenders require only a year in business, and also look at other metrics that assess the strength of your business beyond your personal credit score.
Loan terms should largely be determined by your loan purpose. For example, in much the same way a 30-year mortgage would be appropriate for purchasing a house, but wouldn’t make much sense for buying a car, not all loan terms are suited for every loan purpose. For example, it would probably make more sense to pay for inventory (that would turn in four to six months) with a six- or twelve-month term loan rather than a five- or ten-year term.
A Business Line of Credit
A business line of credit can be a good option for small businesses that have occasional capital needs or have need to sometimes access credit very quickly. A line of credit allows the business owner to use credit when needed, pay it off, and use it again. What’s more, interest is only charged on the amount of credit they use and when they use it.
Unlike a business credit card, a line of credit will often come with a higher limit for qualified borrowers and depending upon the lender, can be easily accessed with a direct deposit into your business checking account making it very simple to utilize. A deposit of cash in your bank account allows for a broader use than a credit card. For example, credit cards cannot be used for some inventory purposes, payroll, etc.
Determining what type of credit is right for your business is a combination of looking at how long you’ve been in business, what you need the funds for, and the type of financing you will likely qualify for. The good news is, if you own a small business and need capital, there have never been more options available. The first step is determining which type of financing makes the most sense for your situation.