Most small businesses need extra financing now and then. Investing in technology, hiring more help and marketing new products go hand in hand with growth.
You can meet ongoing capital needs by opening a business credit card, getting a small-business loan through a bank or borrowing from an online lender. Knowing the pros and cons of each option will save you money and keep your credit score from taking a hit.
Business Credit Cards
If you need anywhere from $5,000 to $ 50,000 but lack the collateral for a bank loan, a revolving credit account may be the solution. As long as you make payments on time and don’t exceed your limit, you can continue to use the card as capital needs arise.
Business credit cards usually come with the same perks that personal cards do. You’d probably get cash back for purchases, and you could also take advantage of 0 percent introductory rate promotions. That means that your balance would be interest-free for a specified time period, usually six to 12 months. Introductory promotions save a lot of money as long as you pay off the account balances before the promotions expire.
Let’s say that you opened three accounts with $5,000 limits. Without the hassle of applying for a small-business loan, you’d have $15,000 of working capital for inventory, a new phone system or office supplies.
Credit cards are also ideal for business owners who need accounting help. Detailed transaction and payment records are provided, and credit accounts can be linked to software that tracks expenses in real time. Software that organizes your records not only saves a headache at tax time, but some programs highlight eligible deductions.
There are disadvantages. For one, your annual percentage rate would be much higher than it would be on a secured loan. If the card had a variable APR, interest would fluctuate with the prime, and your monthly payments could go up.
Here are other pitfalls to be aware of:
- High fees for late payments or exceeding your limit
- A negative impact on your personal credit score for late payments or a poor credit utilization rate
- Potential seizure of personal assets if you were required to sign a personal guarantee
The SBA charges a much lower interest rate than credit card companies, especially if you can pledge an asset as collateral. Loan terms must follow SBA guidelines.
In order to get approved, you’ll have to show proof of robust revenue and profitability. Your credit history must be impressive. You’ll have to supply personal and business financial records and tax returns. You’ll have to show proof that you can repay the loan. Depending on how much you borrow, you may have to make a down payment.
There are drawbacks to bank loans:
- The necessity of appearing in person
- Difficulty getting approved
- A two- to six-month wait for funding
- Potential forfeiture of an asset pledged as collateral
Loans From Online Lenders
Banks have been far less willing to help entrepreneurs since the 2008 recession. According to Forbes Magazine, online lenders picked up the slack at a rate of about 175 percent annually.
If you don’t qualify for a bank loan or need cash faster than it will take a bank to fund you, consider getting a loan online. You can complete an application on your laptop or cell phone, and you’re more likely to be approved. Depending on the size of the loan, funding takes anywhere from a few minutes to one week. For loans less than $100,000, you typically don’t have to provide collateral.
Be prepared, however, to pay a premium for the convenience:
- Interest rates from 20 to 113 percent
- High origination fees and prepayment penalties
Borrowing is a necessary evil in any small-business venture. Since requirements, terms and interest rates vary wildly among lenders, it pays to read the fine print and weigh the pros and cons in advance.