Home » Small Business Financing:Should You Take Out a Loan, Open a Credit Card, or Start a Line of Credit?
When it comes to small business financing, there are a wide range of options to choose from. Small business loans, business credit cards, and business lines of credit are just three of the most popular. But which option is the best.
Which provides the best benefits with the least drawbacks. Is one better than the others for certain types of small business financing activities, such as business debt consolidation.
Or should your small business funding use a combination of two or more of these options. How do you choose. We’ll answer all these questions in our guide to small business financing.
Defining Your Small Business Financing Needs
The real key to finding the right small business financing is to understand your own business needs. How do you intend to use the funds. Are you going to purchase equipment that’s meant to last years. Are you struggling to pay your employees.
Need more money for a marketing campaign. Looking for funding to buy inventory to sell. The nature of your intended use for small business funding defines the criteria for what financing option may be ideal.
Use dictates the time frame in which you intend to spend the money, when you expect to see a return on that investment (if ever), and also sets the stage for how the expense interacts with your existing accounting, operational income and expenses, and so on.
In short, you need to know the use of your small business financing before you can answer questions about what option might be best for your needs.
And, that’s not to say that a definitive use is required – in many cases, small business lenders don’t set any restrictions on how their funds are used.
You may not have a specific use in mind for your small business funding, but rather be looking for funds to provide a buffer or safety net for your operational expenses.
That, in and of itself, is a specific use case, however, for the purposes of determining which small business financing option is best.
It’s easiest to make a decision on small business financing choices if you’ve written down and roughly hashed out your intended use for the money – even if that use is not clearly definable to a specific vendor, customer, or ledger line item up-front.
Understanding the Differences
Once you have this basic understanding of your intended use for your funds, you can start to analyze the pros and cons associated with each of the different small business funding options that are available.
Because of the nature of things like the repayment duration, interest rate, qualification requirements, and other factors for different small business financing options will vary somewhat from lender to lender, there is no universal “right choice,” even for a given use case.
With that said, the following characteristics tend to apply to the vast majority of products in these categories offered by different small business lending firms today, including those available from BizFly Funding.
- A small business loan provides up-front lump-sum funds to a business.
These funds are then paid back over time, with interest. The time scale is variable depending on the exact type of small business loan, the lender, and other criteria. Interest rates tend to be lower than on credit cards, and may be lower or higher than some lines of credit.
- A business credit card provides a maximum borrowing limit, with no up-front payment or benefit.
As the credit is used, the outstanding balance increases. Interest is charged on that outstanding balance, and a minimum payment amount must be made each period.
Interest rates tend to be the highest on this kind of financing option, though often there are perks (such as reward points) available.
- A business line of credit is kind of a hybrid between the two other small business financing Rather than operating as a credit card, however, the line of credit provides a maximum you can borrow up to.
Then, you borrow – as cash – the amount you need as you need it, and repay it over time. You can borrow up to the maximum, repay some (or all), and borrow again – fractionally or entirely – up to the maximum. This is in contrast to a small business loan where you get all the funds up front.
Now, let’s look at some specific use cases that are best served by different types of these small business funding options.
Best Choices for Business Debt Consolidation
When you are looking for business debt consolidation or debt help for small businesses, usually a small business loan is the only choice that makes sense. You are looking to replace multiple outstanding loans or credit products with a single, consolidated loan or credit product.
As such, a small business loan’s characteristics make it the ideal choice of small business funding option. Revolving facilities, such as a credit card or line of credit just don’t make sense for business debt consolidation.
BizFly Funding recommends business debt consolidation always be undertaken with a small business loan designed for that purpose.
Best Choices for Growth and Major Purchases
To undertake business growth initiatives, major asset purchases, and similar larger expenses, a small business loan or business line of credit will usually work well.
Credit cards tend to have lower limits and higher interest rates, and be more tailored for ongoing, multiple small expenses. A business line of credit may work as a middle ground, depending on the size of the purchases or expenses to be made.
But most experts, including our team at BizFly Funding, recommend a structured small business loan for well-defined growth and purchase expenses.
Best Choices for Working Capital and Cash Flow
Finally, for working capital or cash flow needs, a small business loan is not the ideal choice. Since these needs tend to be variable, and are often based on income and expenses in a given business period, a flexible small business financing option is required.
For these uses, a business credit card or business line of credit is often the best choice.
It can save you a great deal on interest charges compared to a small business loan, since you only need to pay interest on the outstanding balance, and only utilize exactly as much of the credit line as you need at any given time.
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