Make sure you know all the options before you decide which loan is right for your business.
by Chris Freeburn

All businesses find themselves facing a variety of different circumstances under which they need more money than they have on hand. There are a variety of financing options available to small business owners to address these situations, ranging from credit cards to term loans and lines of credit, business home equity lines of credit, and traditional business loans. So, which option is right for your business?

Many small business owners use business credit cards to pay for everyday purchases, office supplies, and small equipment. In addition to their obvious convenience, many cards offer rebates, discounts, and extended warranties on specific purchases, which can result in significant savings for your business. There are also cards that offer cash back or rewards points on all your purchases which could result in your business receiving cash at the end or the year or points to use to purchase additional items.


If your business experiences seasonal fluctuations or at times you need an occasional influx of capital, a business line of credit may be the right highly flexible product for you. Funds can typically be made available in cash or on a credit card. Also, with a line of credit, you only pay interest on what you use, so for instance if your company receives a $50,000 line of credit and you utilize $25,000, interest is only charged on the $25,000 used. You have the ability to borrow up to your maximum line of credit limit and continue to borrow more as you pay back the loan amount.

Banks will provide term loans, often presented as "working capital loans" or "accounts receivable loans," to small businesses to cover new vehicle purchases, new equipment purchases, and office expansion. Term loans are also a good debt consolidation tool should your business find the need to consolidate higher rate loans from other sources. Term loans can extend anywhere from three months to five years and, depending on your bank, your loan rate will likely be fixed. In order to obtain a term loan your bank will want to know the reason for the loan and will want to see reasonable financial projections to demonstrate that you will be able to repay it. "Your own credit history may be taken into consideration along with that of your business," says Skip Honigstein, chairman of the Orlando chapter of the Service Corps of Retired Executives (SCORE). Honigstein says that term loans are best suited for capital equipment purchases that will generate increased revenue within a relatively short period of time. Many term loans offer the option of extending the loan if a certain percentage of principal is repaid at the end of the loan. For example, a payment of $2,000 on a $10,000 loan might allow you to extend the loan for three or four months.

For a large expense that you expect to pay off over a number of years, such as the purchase of commercial real estate or a new business, traditional business loans make the most sense. Traditional business loans usually require some form of collateral - a personal or business asset - to secure the debt. Business loans feature a variable or fixed interest rate and have terms ranging from several years to a decade or more. Many banks are placing increased emphasis on serving small businesses and are willing to work with small business owners to grant traditional business loans to even very small companies. Additionally, the Small Business Administration (SBA) offers a loan program which guarantees loans from participating third party lenders. The SBA prefers business owners who have an equity interest in their company, as well as sufficient collateral to secure the loan.

Many business owners and those who are starting new businesses find that tapping into the frequently skyrocketing equity of real estate they own is a convenient way to get the funding they need to grow or start a business. What's extremely attractive to many new small businesses or businesses with little to no business credit history is that your payment record is applied to your business credit rating, allowing your company to establish a credit history that will be beneficial when applying for additional business credit in the future. However it is important to note that funds for a business home equity line of credit must be used for your business.

Chis Freeburn is an associate writer for Business 24/7 magazine.

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