Published By Janet Gershen-Siegel at August 16th, 2017
When trying to get small business funding, you have inevitably come across both ways to get cash. And that’s great! But when it comes to credit lines versus business loans, which one is truly better for YOUR business?
Every small business needs to borrow money at some times in its history. Whether that is to take advantage of a real estate or equipment deal, or to cover payroll, or ride out lean times, it does not matter. A small business just needs money and does not have the cash on hand at the time it needs those funds.
Credit lines are the amount of credit available to your business. So this is often when you have a business credit card. Business loans are, as you might expect, money from lenders. And they must be paid back with interest. While you are wondering how business credit scores work, the truth is, both of these options are factors.
They are both answers to questions about what affects business credit score. And they are both places where to establish business credit.
So read on, and learn what your competitors might not even know.
Credit is a lot like small, short loans. However, the advantage of credit – a huge advantage – is that interest does not start to kick in until you are late with the payments. If you are never late with paying back credit, you are not going to be charged any interest on it.
Furthermore, credit lines can come from a lot of different places. Some of these less traditional credit lines have far less stringent requirements than others. And many of them are a lot less strict about your credit history than business lenders are.
A credit line, or line of credit (LOC), is an agreement between a borrower and a financial institution or private investor which sets a maximum loan balance which a borrower can access.
A borrower can access funds from their line of credit at any time, as long as they don’t go over the maximum set in the agreement, and so long as they meet all other conditions of the finance institution or investor like making prompt payments.
Credit lines deliver many distinct benefits to borrowers which include versatility. Borrowers can apply their line of credit and just pay interest on what they use, unlike loans where they pay interest on the total borrowed. Credit lines can be re-used, so as you acquire a balance and pay that balance off, you can use that available credit again, and again.
Credit lines are revolving accounts similar to credit cards, and compare to various other kinds of financing such as installment loans. Often, lines of credit are unsecured, much the same as credit cards are. There are some credit lines which are secured, and for this reason easier to be granted
Credit lines are the most commonly sought after loan type in the business world although they are popular, authentic credit lines are unusual, and hard to find. Many are also very challenging to get approval for calling for good credit, good time in business, and good financials. But there are various other credit cards and lines which few know about that are available for start-ups, bad credit, as well as if you have absolutely no financials.
A lot of credit line kinds that most business owners think of come from traditional banks and traditional banks use SBA loans as their key loan product for small business owners. This is because SBA assures as much as 90% of the loan in the event of a default. These credit lines are the hardest to get approval for because you must qualify with SBA and the bank.
There are two main varieties of SBA loans you can typically obtain. One kind is CAPLines. There are really 5 types of CAPLines that can work for your small business.
You can also obtain a smaller loan amount more quickly using the SBA Express program. Most of these programs offer BOTH loans and revolving lines of credit.
From the SBA … “CAPLines is the umbrella program under which SBA helps business owners meet short-term and cyclical working capital needs”. Loan amounts are offered up to and including $5 million. Loan qualification requirements are the same as with other SBA programs.
This one advances against anticipated inventory and accounts receivables. It was developed to aid seasonal businesses. Loan or revolving kinds are on offer.
This one finances the direct labor and material costs of performing assignable contracts. Loan or revolving types are available.
This one was made for general contractors or builders constructing or renovating business or residential buildings. This line is for fund direct labor-and material costs, where the building project works as the collateral. Loan or revolving types are available.
This line is for short-term working capital and operating needs. Proceeds must not be used to pay delinquent withholding taxes or similar trust funds (state sales taxes, etc.) or for floor planning. You can borrow as much as $5 million.
The SBA now offers Express under its 7(a) programs.
To be eligible 7(a) loan assistance, businesses must:
You can get up to $5 million.
Private investors and alternative lenders also grant credit lines. These are a lot easier to qualify for than conventional SBA loans. They also require much less documentation for approval. These alternative SBA credit lines usually call for good personal credit for approval.
Unlike with SBA, many of them don’t demand good bank or business credit approval. Many of these sorts of programs require two years’ of tax returns. Tax returns must demonstrate a profit. Rates can vary from 7% or more and loan amounts can range into the millions. Loan amounts are often based on the revenues and/or profits on tax returns. In some cases lenders may want other financials including a profit and loss statement, balance sheets, and income statements.
With this form of business financing, you deal with a lender who concentrates on securing business credit cards. This is a very rare; very little know of program that few lending sources offer. They can often get you more approvals than you can get on your own.
This is because they are familiar with the sources to apply for, the order to apply, and can time their applications so the card issuers won’t refuse you for the other card inquiries. Multiple cards generate competition, and this means they will raise your limits, often within 6 months or fewer of first approval.
Not only will you get funds, but you build your business credit also, so then you can then use your new corporate credit to get even more money.
Just like with anything, there are big benefits in teaming up with a source who concentrates on this area. The results will be much better than if you try to go at it alone.
You must have excellent personal credit now.
You can get approval working with a guarantor and you can even use a number of guarantors to get even more money. There are also other cards you can get using this very same program but these cards only report to the consumer reporting agencies, not the business reporting agencies. They are consumer credit cards versus business credit cards.
With all previous cards above, you need to have good consumer credit in order to get approval but what happens if your personal credit is not good, and you don’t have a guarantor?
This is when building company credit makes a great deal of sense even if you have good personal credit, building your company credit helps you get even more money.
While one issue with a business loan is interest, another is whether you can get one at all. For new businesses in particular, your corporate credit will be poor and, by definition, have very little history behind it.
As a result, traditional lenders are going to be less than enthusiastic about offering up business loans. After all, they have no idea whether your company will be able to pay back the loan. They will also, often, take out a UCC blanket lien if they do give you a loan. This is a notice which goes on your credit report that the lender has an interest in all of your business’s assets. That sticks until you pay off the loan in full.
Therefore, many of them will also require personal guarantees. If they do not, then you are generally looking at unsecured business loans, which with hefty interest rates. These kinds of business loans can be short term. So you need to pay them back fast.
Or they can be receivables financing. This is where you get a loan based on business you expect to be coming in. It’s because you have outstanding invoices your own clients have not paid to you yet. Or it can be merchant cash advances. These all come with interest rates which are often 40% or higher.
Either way you go your business credit score will be affected by your repayment habits. Make sure those are good ones. Because poor credit habits will always cost you.