Business Line of Credit  vs.  Business Loan

One of the most desired financial products for existing businesses is the business line of credit. An unsecured, true business credit line is more difficult to acquire than a standard business loan, and there are many reasons why. First, let’s understand what a business line of credit is and compare it to a business loan. You can then determine which would be most feasible for you if the situation arises where your business needs access to capital. At some point all business will experience some degree of cash flow problems or unexpected circumstances. Or sometimes a business has it all planned out and is ready to invest in expansion and growth. When the need for capital arises, which financial resource is right for your business?

BUSINESS LINE OF CREDIT – A specific maximum amount of funding is approved for a business that can be accessed as needed. Repayment is more flexible than a business loan and terms are pre-specified over a period of time. Interest can either be fixed from the time of underwriting, or variable in accordance to the market’s prime interest rate. But most importantly, credit lines are less expensive than using actual credit cards with revolving interest rates. A business credit line allows a business to borrow only what’s needed and offers the ability to tap into their credit line if additional funding is needed later. In most circumstances, the outstanding balance cannot exceed the maximum amount approved. Credit lines can be increased over time once the business establishes a tenured relationship and positive payment history on previous withdrawals and repayments.

BUSINESS LOAN – This is a debt obligation that is either secured or unsecured where an approved amount of funding is granted for a business and lent for specific purposes. The repayment terms are determined at the time of underwriting and paid back monthly, weekly or daily, depending on the lending arrangement. Interest rates and fees are paid in addition to the principle debt amount, and if the business wishes to access additional capital after the initial loan is taken, that business will have to go through the underwriting process again and be re-approved each time.

 

 

Now, most of that may seem simple, but there are pros and cons to each, and specific situations where one may make far more sense than the other. Here are some common situations where a business may need access to capital:

â–  New Equipment

â–  Expanding the Physical Location

â–  Marketing and Advertising

â–  Meeting Payroll Expenses

â–  Hiring Additional Employess

â–  Seasonal Revenue Declines

â–  Additional Inventory

â–  Supplementing Cash Flow

â–  Unforeseen Emergencies

Situations and needs like this will undoubtedly come up for any growing business, some unexpectedly, some planned and foreseen. For situations that may be more unforeseen, cash flow problems, seasonality revenue dips, and especially emergencies that require immediate funding, are reasons a credit line may be a more practical method of lending. The funds are already approved, the credit line has been granted, and within 24 hours you are able to tap in and utilize what’s available to satisfy those short-term hurdles. Sometimes you may run into a couple of slow months, payroll still has to get paid. Sometimes your invoices may be outstanding for 30, 60, even 90 days, but you have ongoing expenses and bills that are due now, and waiting for those funds aren’t an option. Your credit line is there to supplement those cash flow situations. This ongoing source of funds is essential for short-term cash needs, and it’s an excellent way to maintain business cash flow.

For the more planned and foreseen situations where the need for capital is necessary, a business loan might make the most sense. If you’re planning on investing in your physical location, purchasing new equipment or putting together a marketing/advertising campaign, business loans are tailored more specifically to the use and needs of the funds. The terms are laid out and you’re given a set time and repayment schedule. The amounts needed and use of funds should be determined prior to applying. That renovation project should have a total cost and time-frame. You should have a pretty good idea of the total cost of that equipment out the door, taxes, delivery and installation included. When you go to apply, this specificity is necessary and appreciated by the lending institutions. You will have a structured amount lent, and you will know how long you have to pay it back and what you’ll pay back in total.

 

How To Apply and When?

 

  As you would probably expect, 99% of business owners apply for a loan only when they’re in need. Makes sense right? Why else would you pay fees and interest on money for which you have no immediate plans? But actually, the best time to apply for a business line of credit is when you don’t really need money. When your cash flow is strong and your numbers are great and you’re not in desperate need of a loan. At this time the lending institutions are more generous in the approvals and amounts granted. During the months when your business revenue peaks, you may not think it’s a good time to apply for anything, but this is actually one of the best times. An approved credit line means that money will be there when you need it. It’s much better than scrambling to find a quick-fix, business loan, and because your revenue is down or your cash-flow is weak at that particular time, the approvals are lower than what’s needed, the terms are far shorter than expected and the money is almost always more expensive.
 There are nearly 30 million small businesses in the United States, and that number continues to grow each and every day. This is why lending institutions have created unique and specially tailored methods of lending to accommodate the growth and variety of industries and businesses. No two businesses are exactly the same, and this is why a consultative approach is absolutely necessary when seeking business financing.

Allow Statzer Consulting the opportunity to pair your business with the most feasible and practical lending options on the market. Take a consultative approach that will ensure you have all of the information about what’s available to you and your business.

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