When seeking a business line of credit, you have a variety of options. Choosing the right funding method can help make or break your business. Providing business loans are a major part of today’s lending industry, so shop around.
3Ms of Business – Three Primary Criteria
Businesses require sufficient amounts of three primary criteria:
A business needs money to hire employees or contractors. Money is required for equipment and materials. Unless you sell stock or have capital from the principals, you’ll need a loan or business line of credit. It is important not to run short on funds when a business depends on making large purchases of inventory. A business line of credit becomes even more useful as the company grows.
What Is Your Borrowing Capacity?
Before seeking a business line of credit, assemble your documents. Understand your creditworthiness. You may need to supply tax returns. You’ll definitely need to provide your business plan, profile, projections, and financial statements. If your company is small or just starting, lenders will review your personal credit history. You may have to obligate personal assets. If you have been operating awhile, your company’s credit history will influence the type of business line of credit you can obtain.
Business Loans And Credit Lines
Secured business loans with specific repayment terms may be appropriate for large asset purchases such as land, buildings and major equipment. The asset will generally be used as collateral. For most ongoing operations, a business line of credit will be most valuable.
The easiest method for companies to obtain funding is using supplier credit, which may be secured or unsecured. Interest varies. Credit terms range from seven days up to six months. Longer supplier credit arrangements are often made for durable goods and equipment.
Bank Business Financing
Bank business financing include a secured or unsecured revolving business line of credit. In the business line of credit, no cash is taken nor interest paid until the money is needed. Then the borrowing company draws down and repays up to maximum established limits of credit.
Secured Business Line Of Credit
A business line of credit is easier to obtain when collateral is offered. Because security covers most of the risk, lenders generally take less time to provide the secured business line of credit. Often, the business owner can use both personal or business assets as security.
Bad Debt Secured Loan Or Credit Line
When a potential borrower has bad debts or a poor credit score, obtaining business financing presents a challenge. It helps when the applicant can demonstrate a reason for the bad debts, and shows even a short history of improved payment practices. A customized plan may be available to help finance business.
A greater amount of collateral may be required. Until the borrower shows a continual behavior of creditworthiness, a higher rate of interest will be imposed on a bad debt secured loan or business credit line. It may be a small price to pay to rebuild one’s life and business. Yet, great care should be taken to make sure the borrower does not dig a deeper financial hole.
Unsecured Business Line Of Credit
An unsecured credit line provides your company the funds that it needs for operations to continue without collateral. Fewer risks are involved for the business owner. For companies that have large expenses or need to purchase inventory seasonally or in bulk, an unsecured business line of credit offers much more flexibility.
It may not be easy to obtain an unsecured business line of credit in the amount that you require. The process will take longer. Lenders will scrutinize your company’s operations and opportunities, as well as its credit history. Depending upon the size of the business and the structure, the lender may scrutinize the owner’s personal assets and credit history as well.
Small Business Credit Cards
A small business credit card is an unsecured business line of credit for companies that are just starting out. We don’t advocate financing a business with credit cards. Yet, small business credit cards can help get new companies rolling.
As with any unsecured credit card, you must prove creditworthiness. The maximum credit limit and interest rates will vary. Small business credit cards are easier to acquire than a business line of credit. They offer convenience. Most suppliers accept payments by credit card. They will not be useful to pay employees, however.
Small business credit cards can only supplement your income and business line of credit or other funds.
Which Business Line Of Credit Is Best?
Before applying for a loan or business line of credit, you need to determine:
- The amount of funds you require
- Your collateral or borrowing capacity
- Your ability to repay
- What type of business line of credit your credit number supports
Analyzing your business projections and budget are paramount. Determine whether you can afford to borrow money. If so, how much can repay on a steady basis?
An unsecured business line of credit clearly offers the most safety for the borrower. The old adage “you must have money to borrow money” applies. Without a solid business history and a good relationship with your banker, it is difficult to get an unsecured business line of credit. It will take longer to process. Your assets and credit will be under a microscope.
If you don’t qualify for an unsecured business loan, a secured credit line might be the best route. This may be pushed through the lender faster. Your credit limit might be higher. A sufficient business line of credit is a huge advantage that can outweigh the inconvenience of providing collateral.
Small business credit cards may be the only option when starting a very small new business with few resources or limited credit history. Small business credit cards are ideal for convenience. They also provide a type of backup business line of credit.
There are also drawbacks. For start ups, most credit card companies offering unsecured small business credit cards require a personal-liability agreement from the owner. If you can’t make timely payments, you can damage your business and personal credit score.
Complexities In Choosing A Financing Option
The complexities in choosing a financing option can be intimidating. Lenders want to make sure your business can repay the amount borrowed. Terms may vary. When seeking a business line of credit, your choice of lender is equally important as the type of loan.
We hope this article leaves you better equipped to choose the best secured or unsecured business line of credit, loan or small business credit cards.