Finance Your Business
How to choose the right type of credit for your business
Credit is essential for most businesses to grow, seize opportunities and fill in cash-flow gaps. According to the 2019 Chase Business Leaders Outlook, 61% of business are considering financing a specific part of their business.
There's a range of credit options to choose from if you're a business owner. The trick is finding the one that best matches your needs and objectives. To help you sort through the choices, we've outlined the most common types of credit.
A term loan is what you might think of as a traditional loan. Your business receives money to use over a fixed period of time. Term loans work best for purchasing assets that you expect to increase your revenues over an extended period, such as equipment or vehicles. Loans with fixed interest rates allow you to predict your payments and can help protect your cash flow while you benefit from the asset.
The U.S. Small Business Administration (SBA) offers loan programs for companies that may not meet conventional lending requirements. Though SBA loans are offered through banks, the government guarantees a substantial portion of them—making them less risky for lenders. The government guarantee also means that SBA loans often have higher borrowing limits and longer repayment periods.
The primary types of SBA loans are general business 7(a) loans; CDC/504 loans, which are generally used to buy equipment, machinery or real estate; and microloans of up to $50,000 to help small businesses start up and expand. You can find more information about each loan type on sba.gov.
Lines of credit
Lines of credit provide a pool of money that you can tap as needed, and you pay interest only on the amount you use. It's a revolving account, so as you pay back what you owe, you may borrow again up to your credit limit. This type of financing is usually used to cover short-term expenses, such as inventory or payroll.
Lines of credit usually have a variable interest rate. You may have to pledge some assets as collateral; in cases where you don't have to pledge anything, the line of credit may have a higher interest rate and lower borrowing limit.
Some lenders offer financing options specifically for equipment purchases such as a delivery trucks, refrigeration units or packaging machinery. These options vary among lenders, and may be structured as term loans, lines of credit or a hybrid of the two. Equipment financing may offer businesses more flexible repayment terms than traditional loans, and in some cases, may not require a down payment. Some lenders may also finance a small percentage of "soft" costs, such as sales taxes or installation.
Business credit cards
For some businesses, credit cards may be easier to qualify for than other short-term financing sources. They're convenient for routine purchases, while the ability to delay payment until the end of each billing cycle can help you manage cash flow. Credit cards can be a steppingstone to other types of credit, since making consistent, on-time payments helps to build a solid credit history. Many business credit cards also offer rewards that accumulate with purchases, such as airline miles, cash back or additional bonus points. For example, the Ink Business PreferredSM credit card offers 3x points for transactions in certain business categories, such as advertising purchases made with social media sites and search engines.
Instead of taking on debt, you could sell a stake in your business to an investor or group of investors who hope to make a substantial profit. Equity investors, including angel investors and venture capital firms, typically look for young companies with high growth potential, such as software, biotechnology and e-commerce firms.
They can often provide valuable expertise and introductions, but their involvement generally means you'll have to share not only future profits but also some degree of control over the company.
Ami Albernaz writes on technology, finance and small business-related topics.She is a former lifestyle columnist for The Boston Globe and contributor to The Christian Science Monitor.