Operating a business takes money and just about everyone has heard the expression you have to spend money to make money, but where do you get the money if you aren’t independently wealthy, or established? A business loan is the answer to most business needs. It doesn’t matter what size a business is, almost every business owner at some point has to consider a loan. A business loan can help a business get started, expand once it’s on its way and growing, or get a business through the tough spots that happen occasionally. Deciding on a business loan is a key step, but which loan is right for you and how do you decide between the many different various types?
Skip the Loan and Use Plastic
Some business owners opt for a slight variation on a business loan and choose to use credit cards to back their startup, expand on an existing business, or help their business through a tough stretch. The positive reason for using credit to fund your business is that it is often easier to get, or already existing in a personal credit card, but there are a couple of serious negatives to using this type of business financing. The first negative is that unless your existing credit line is unlimited there might not be enough funding on your credit cards. The second negative to using personal credit cards is that your personal and business cash flow is not separate. This can create havoc if you need to use your credit for important personal needs and it can have a similar effect on business funds if you suddenly have to tap into your credit for personal reasons. Lastly, the interest rate on credit cards is normally much higher than any of the various types of business loans.
A Bridge Between Credit Cards and Business Loans: Lines of Credit
A line of credit operates much the same as a credit card. You apply for a business loan line of credit and based on your qualifications you are approved for up to a certain amount. You are not charged on the loan until you actually use the money and are only charged for the amount you actually use. Another similarity between lines of credit and credit cards is the loan is often an unsecured loan meaning no assets are used to guarantee the loan such as homes, cars, the business itself. However, unlike a credit card business lines of credit have interest rates much closer to a traditional loan level.
On the downside those interest rates are usually variable like a personal credit card and go up or down over the period of the loan. Another downside to lines of credit is that like a credit card your payments will usually be only a little more than the interest rate each month.
This may seem like a plus at the start because the monthly payments are so low. The catch there is that lines of credit to not extend forever. There is almost always a set number of years for the loan amount to be available. At the end of that time (and sometimes within the last two years of the payback) money is not longer available. After that period, the payments are higher to make sure the money is completely paid back by the end of the loan.
If you have the discipline to make yourself pay more than the minimum every month in order to pay down the loan, this can be a good loan to get. It allows for times when money is tight. You can pay the minimum at those times without risking a default on your loan.