As a small business owner, your priority is to grow your clientele, expand and keep a consistent cash flow coming in. But how do you continually invest in your product or services without dipping into every penny you’ve saved? Your savings might not always be enough to cover unexpected expenses as your business grows. Additionally, using personal funds for working capital is usually not sustainable. Every business owner should have access to a bank’s capital for an added layer of security. Whether a line of credit or a term loan, a small business loan can help you stay afloat and cover your bases cost-effectively. You’ll have the peace of mind to focus on what matters most — growing your business.
Business lines of credit
If you’d like large sums of cash available on an as-needed basis, a business line of credit is right for you. With it, you have access to a predetermined amount of money from which you can freely draw. Some lines of credit are secured with assets (such as commercial property, real estate and certificates of deposit) while others are unsecured. Interest is applied only to the withdrawn sum. For example, if the line is $100,000 and you use $10,000 of it, the remaining $90,000 will be free of financing fees. The unused portion will be there waiting for you should you require it. If you don’t need to use the line of credit, you won’t pay any interest.
Business lines of credit are ideal for stabilizing a company’s future — acting as a rainy-day fund for your business. They’re right for everything from working capital needs to accounts receivable. Being able to tap into funds for unexpected expenses without any delay can prevent you from having to close your doors.
Credit lines also offer vital peace of mind. If you’re up at night worried about meeting payroll that month, knowing you have a line of credit at the ready can help you sleep soundly.
Benefits to consider
A primary advantage of taking out a business line of credit is its low cost, as interest is applied only on the borrowed sum. And though these products function in much the same way as a credit card, small business loan interest rates are usually far lower.
Lines of credit are useful for their flexibility, sometimes offering interest-only payments and no setup costs, and you can use the money for any business needs you have.
To qualify for a small business line of credit, the lender will take an assessment of your financial history. This could include things like your credit scores, company’s assets, cash flow, operating years and industry type. As each lender sets its qualification standards, it’s a good idea to establish a relationship with a lender you can trust.
Business term loans
Have a project in mind that comes with a big price tag? Consider financing it with a business term loan. With it, you’ll be borrowing all the money at once, so you can pay for your project in real time. The repayment term can range from a few years to much longer, though three to five years is common. You will be expected to send fixed monthly installments, which makes planning easy.
In general, business term loans are used to finance a purchase that will take longer than 12 months to repay. As opposed to a line of credit, which is excellent for unexpected short-term expenses, a term loan is typically for costs you have included in your annual plan, such as purchasing new equipment or hiring additional employees.
To determine if you qualify for a business term loan, the lender will focus on much of the same data as it would for the line of credit. That includes your credit scores, the number of years you’ve been in business, your annual revenue and your cash flow. The amount you ask for and its purpose should make sense to the lender.
Be aware that borrowing from a lender with high standards is vital. While you may be approved for a business term loan when others turn you down, the interest rate may be prohibitively high and the loan heavy with fees and penalties. Working toward and waiting for the best product you can get will save you a lot of money in the end.
Benefits to consider
The amount you can borrow via a business term loan may be far higher than with a business line of credit. If you’re like many small business owners, you may not have hundreds of thousands of dollars at your disposal. The advantage of attaining financing from a bank is to be able to maintain a healthy deposit base in your operating account because you’re able to borrow outside capital cheaply.
Before pursuing a business term loan, focus on all the expenses that may be associated with it. Some lenders charge a whole host of fees, which will increase the loan’s overall cost. Shop carefully and ask if there are early payment penalties or origination fees.
Apply when ready
Whether you’re interested in a business line of credit or a business term loan, be prepared to present a transparent picture of your business during the application process. The lender will examine your business’s tax returns, legal and ownership structure, and detailed financial statements. You will give the lender permission to pull your credit reports so it can have insight into the way you’ve managed credit products before.
An additional benefit of taking out and managing business lines of credit and term loans is that you establish a trusted relationship with the lender — a connection that will behoove you in the long run. Learn more about First Republic Bank’s small business loans options.