When it comes to starting and operating a small business, finances play a huge role. Luckily, there are a wide variety of options for small businesses. However, because small businesses tend to be looking for a quick solution and something that will be available to them frequently down the road, it may be a good idea to consider a business line of credit. This type of financial option provides businesses with working capital that allows the business owner to fulfill orders, maintain inventory, perform expansions, and meet any other business needs that are urgent.
Understanding the Financing Aspect
When you work with a lender and a lender qualifies you for a line of credit, you will be presented with a number. This number is the maximum amount of money that you can borrow at any given time. With business lines of credits, interest rates are often the lowest at 5 to 12 percent. Credit cards usually range from about 12 to 30 percent whole some online lenders may exceed 100 percent internet rates. However, keep in mind that the rate is sometimes variable, which means it could increase over time, so ask about this ahead of time.
Primary Differences Between Lines of Credit and Other Financing Options
It is important to understand that each business financing option is different and offers its own set of advantages and disadvantages for the business and for the individual. When considering business financing, it is important to look at the following key differences between the different types of financing options:
- Usage - When you get a business loan, you will receive the funds upfront and all at once. However, with a business line of credit, this isn't necessary. Instead, you can borrow a little or a lot, and continue to borrow up to the maximum amount of your line of credit as long as you are honest with repaying your lender.
- Payment - With a business line of credit, you will be required to make a monthly payment just like with a credit card or a standard business loan. The difference is that if you choose not to use your line of credit that you won't have a payment, which is not an option with a business loan.
- Interest Rates - With a business loan, you are going to be paying interest for the entirety of the loan. However, with a credit card or even a business line of credit, you will only pay interest based solely on the amount that you have borrowed.
- Qualifications - Business lines of credits and loans often have an extensive list of qualification requirements that must be met before you can be approved, which can make it harder for small businesses - especially new ones - to be approved. Business credit cards, on the other hand, tend to have fewer requirements and are sometimes easier to qualify for.
Speak to a financial expert before applying for a loan, line of credit or even a credit card if you're uncertain of how you and your business stand. For more information contact, a company like Smith Koelling Dykstra & Ohm PC.