Learning & Insights
What type of credit is right for your small business?
Access to cash is critical for your business' future growth. But which type of credit is the best fit? To answer this question, it's important to understand your options and how they may help with your financial plan.
If you need to purchase an asset (that will likely increase your revenue over time), a term loan may be a good option. These loans carry a fixed term for a specified amount—that way, you can predict your monthly payment and better manage your monthly cash flow. And, in most instances, your rate will be lower than unsecured credit (such as business lines of credit and business credit cards).
Line of credit
Using a business line of credit can provide the money you need when you need it. Most times, a line of credit is used to cover short-term expenses, like payroll or inventory. With a business line of credit, you're approved for a specified credit limit that can be increased over time. It's a revolving credit line, so once you repay the amount you use, it becomes available again. Typically, business lines of credit have a variable interest rate, which may be slightly higher than other business loans.
Business credit cards
A business credit card may be the easiest way to fund short-term financing needs. This type of credit is convenient for routine purchases, and you only pay interest on what you owe. Once you're approved, you can use your card for day-to-day expenses up to your credit limit. And you can give cards to your employees at no extra charge and set their spending limits.
Many businesses choose a credit card with rewards. You can accumulate points and use them for travel, merchandise and more.
If you don't meet conventional lending requirements, the U.S. Small Business Administration (SBA) has several loan programs available for you to consider. Most of these loans are used to help small businesses with startup or expansion plans that may include buying equipment, machinery, or real estate—and even help refinance debt.
SBA loans are guaranteed by the government. Typically, these loans offer lower down payments and longer repayment terms than conventional business loans.
Some lenders offer equipment financing for large purchases like machinery, delivery trucks and even refrigeration units. You'll find equipment financing varies from term loans to lines of credit—or a hybrid of the two. Equipment financing often gives you more flexible terms than traditional business loans and may not require a down payment.
Whatever you decide, it's important to weigh all your options. Consider the reasons your business needs credit. Once you've established why you need financing, you can pick the right type of credit to meet your business needs.