Although most small businesses are initially funded by the owner, outside financing often becomes necessary to grow your enterprise.
There’s no lack of options when you finally decide to go for outside financing- a small business loan or credit card. So which is best for your situation? You need to understand some fundamentals about each option before you can make a decision.
Business loans and credit cards both allow you to spend money you don’t currently have and repay it at a future date. As with personal credit, you have more options with a higher credit score. Also interest rates for both can be tax deductible if used for business purposes.
The general rule is that for one-time significant purchases, such as real estate, you are better off with a business loan. For short-term transactions, such as stocking up on office supplies or getting a new window, a credit card may be your best solution. But as with everything else, there are exceptions to these rules.
With a business loan from a bank or alterative lender, you’ll receive a lump sum that is repaid on agreed upon terms between the two parties. As noted, these are targeted for more expensive items, such as major equipment and large inventory purchases or refinancing existing debt. Essentially, you would get a loan to help grow your business on a longer-term basis.
Among the benefits of a business loan is that it typically allows you to access higher amounts than a credit card.
Bank loans are difficult to get, with an average approval rate of around 20% for major banks. Collateral is often required, and you or your business will need a high credit score. These loans often take a long time for approval due to documentation requirements and other factors.
Banks are typically not keen on lending small amounts although the U.S. Small Business Administration (SBA) ’s Microloan Program does provides small businesses with small short-term loans through specially designated intermediary lenders, who then make loans to eligible borrowers in amounts up to a maximum of $50,000
Alternative lenders such as BFS Capital are more flexible in terms of credit score requirements, documentation and other criteria. The decision making process is much faster than banks as well. You should note that these alternative lenders can cost more than most major banks depending on the risk of the loan. However, if you need to make a significant purchase to help grow your business and are not able to qualify for a bank loan, an alternative lender can be a very attractive option.
Additionally, alternative lenders may provide another way for short-term funding needs because of their willingness to make loans for smaller amounts.
A business credit card is often preferable for short-term loans. An important benefit can be the reward programs that you allow you to get cash back or free air travel miles.
One particular offer that is very attractive are cards that offer 0% introductory rate promotions, which means no interest on your card balance for a specified period of time, usually up to 12 months. Theoretically, if you get three or four credit cards, with $10,000 limits, you could quickly obtain $40,000. But you must be sure that you can repay it before the offer ends, or you will wind up having to pay off the cards with an extremely high interest rate.
Although business credit cards do not require collateral, the card issuer may require you to sign a personal guarantee, which makes you personally liable for unpaid debts. The credit card company could go after your personal assets if you fail to make payments.