Some business owners choose a slight variation on a business loan and choose to use credit cards to back their startup, expand on an existing business, or help their business through a difficult stretch.
The reason for using credit to finance your business is that it is often easier to get.
But there are a couple of drawbacks to using this type of business financing. The negative is that unless your credit line is unlimited, there may be inadequate funds on your credit cards.
The second negative to using credit cards is your personal and business cash flow isn’t separate.
Moreover, if you need to use your credit for needs that are important, this can create havoc.
And it can have a similar impact on business funds should you suddenly have to tap into your credit for personal reasons.
Additionally, the interest rate on credit cards is normally much greater than any of the various types of business loans.
Therefore, try to keep credit card debts to a minimum unless you are 100% certain it will pay off.
A Bridge Between Credit Cards and Business Loans: Lines of Credit
A line of credit operates the same as the credit card.
You apply for a business line of credit and based on the qualifications you are accepted for up to a specific amount.
You’re not charged on the loan before you actually use the cash and are only charged for the amount you use.
Another similarity between lines of credit and credit cards is the loan is an unsecured loan.
This means that none of your personal resources is used like automobiles, houses, or the business itself.
However, business lines of credit have high-interest rates compared to a loan.
On the downside, those interest rates are a factor like a credit card and go down or up within the period of the loan.
Another downside to lines of credit is that like a credit card your payments will be only a little more than the interest rate monthly.
Because the payments are low, this may seem like a plus at the start.
The catch here for lines of credit is not to extend.
To explain, there is always a set number of years for the loan amount to be accessible.
At the end of that time money isn’t longer available.
After that period, the payments are higher to make sure the end of the loan pays back the money.
Keep the discipline to be able to repay the loan.
In summary, it allows for times when cash is tight.
Without having a default on your loan, you can pay the minimum.
Conventional Types of Business Loans
If you don’t have an extensive amount of cash, and if you don’t believe a line of credit is perfect for you, all isn’t lost.
There are 4 more traditional styles of business loans to choose from:
Working Capital Loans
These are popular when considering getting a business loan.
They come in two types, secured and unsecured.
Unsecured versions of working capital loans are available to those business owners with credit, a business plan, and established business with a proven track record.
On the other hand, startups are too risky to be granted unsecured working capital business loans.
So if you are a new business keep your expectations in line.
Alternatively, working capital loans that are secured are a little more easy to obtain.
Although the amount of collateral needed to acquire these loans is based on the borrower’s credit.
These loans make it possible for all sorts of business to run their affairs on a daily basis with available money.
Secured loans are commonly secured with other valuable assets, and houses.
Accounts Receivable Loans
These are short term types of financing available when you hit a tough spot.
Importantly, you must have money coming in at a particular time.
For example, a large debtor who is expected to pay you in 3 – 6 months time.
Another example is your business’ records of accounts receivable act as a security for such loans.
On the downside, the rates of interest of these short term loans are usually higher than a long term standard loan.
And you can wind up in a vicious circle of utilizing your assets (receivables) and not have cash left before your next revenue period.
This type of loan should only be considered in a few types of cases of emergency.
Such as the need to fulfil purchase inventory, payroll, or other necessities.
Business Only Loans
This type of loan is applied for using the funds and resources of the business alone and not credit history or any personal credit of the owner.
It is only available to a business with a record of income, the long-term prospect of fluid operation, and very strong business credit scores.
Function Particular Loans
There are times during business operation if you will need a loan for a specific type of purchase.
Such as to purchase new or replace old equipment.
The purchase of property for your business.
Or other dedicated needs there are loans designed to be individually available for only those times.
Getting The Loan
The best way to guarantee success in getting your business loan is to be ready.
Enter your bank using a well-formulated business plan in hand and ensure your credit is up to par.
This includes your business credit history, as well as, your personal credit score.
Likewise, be prepared to show your past tax returns as proof of income and validity.
In conclusion, the best business loan providers will work with you to prepare before the full application and explain to you the list of available options.
Remember, lenders are human too and know some situations are inevitable.
But if you can prove you are on solid footing it will help a great deal in getting your desired business loan.
Faithful in your success!
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