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What’s the hardest part about growing a business? Ask a roomful of small business owners and you’ll get a variety of answers, most likely including: recruiting and retaining employees, building company culture, outmaneuvering competitors. But you’ll also probably hear about financing.
Getting the right type of financing at the right time should be a tipping point, not a sticking point when it comes to growing your small business.
Below, we’ve put together a pros-and-cons snapshot of some popular options for established small businesses that need business capital to keep growing.Credit Card – Putting it on the plastic is what may come to mind first when you’re considering financing options. Pros: A business credit card is a good way for a business to quickly and easily increase its purchasing power. Unlike some other types of financing, you won’t need to put up collateral. If you’ve been financing your business with a personal card, a business card is also a good way to separate your business and personal finances and build business credit. Like a consumer card, business credit cards may also offer purchase protections, but at higher amounts. Often, business credit accounts enable you to flow accounting data into accounting software, facilitating bookkeeping. Cons: The open question is how low an interest rate you can secure, which is often dependent on your personal credit profile. Frequently, interest rates are higher for business credit cards than for other types of financing such as a small business loan. Credit amounts available to you may also be smaller.
Smaller businesses with fewer operating years and lower revenue may find it easier to qualify for business credit cards. Look for low interest rates, good online management functionality or even an app, as well as appealing rewards and perk programs.Term Loans – This means getting a single lump sum up front with an agreement to pay it back (plus interest) over a set period of time. Pros: Many small businesses use term loans to finance a big purchase, such as buying a piece of equipment, an office remodel project, or to expand. Interest rates for term loans are typically lower than for other credit products, and improve with the length of the repayment terms. A general rule of thumb: The longer the loan term, the lower the interest. You also have a clear end date for repaying the amount you borrowed. This can be very helpful when it comes to monthly expense planning. Cons: For larger loans, the application process can often be extensive. You may need profit and loss statements, bank statements, balance sheets, business tax returns, etc. though some lenders with an online portal have streamlined the process. Business Lines of Credit – Even those in business for a few years may not know what the difference is between a business line of credit and a business credit card. A business line of credit may be a better option for you if your business is more established, you need a higher credit limit and you want the ability to get your hands on larger cash advances. Pros: Flexibility is a big one. Once approved for a certain credit limit, you can draw what you need, when you need it and only pay interest on what you’ve taken out. Most businesses must navigate seasonality trends. A line of credit allows you to ramp up the purchase of material or inventory ahead of a busy season and pay back the money borrowed when your sales actually happen. Interest rates on lines of credit are also typically lower than those for credit cards. Cons: Compared to qualifying for a credit card, your business will need to have a longer operating history with stronger revenue numbers. With a line of credit you also give up the benefits of a business credit card, such as being able to distribute them to employees and access rewards or cashback programs.
According to the National Federation of Independent Business, the small business optimism index is at its second-highest level in history and we think it may be a good time to expand.
A big part of how you want to solve the credit equation for your own small business, comes down to how you plan to use the money.
If you’re looking to take your small business to the next level, I hope you’ll make us part of your entrepreneurial journey! Visit our new Small Business Express Lending solution to learn more*.
*Loans and lines of credit are subject to credit approval.
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