Credit options: What's the right type of credit for you?
There are many types of financing. Here's what you need to know about the options that are out there.
In order to decide which type of credit best fits your need and financial plan, it's important to understand your options. You'll want to weigh factors such as the amount of cash you need, how quickly you will be able to pay it back, and whether you can provide any collateral. Here are six common credit types and how they could help with your financial objectives.
#1. Secured credit
In secured financing, the credit applicant uses personal or business assets such as investments, cash, real estate, equipment, or inventory as collateral. Secured credit can be a good choice for businesses that are starting out and haven't yet established a long credit history. More established businesses may be interested in secured credit as it may allow them to borrow more money and the interest rate may be lower than for unsecured credit.
#2. Unsecured credit
Unsecured financing requires no collateral, so approval for this type of financing will depend on your credit history and capacity to repay the funds. Most lenders will want to see that your business has been around for at least a couple of years, your credit card balances are within a reasonable range, and you have strong enough cash flow to be able to repay, among other factors.
#3. Business credit cards
Business credit cards are similar to personal cards but typically allow for higher credit limits and multiple cardholders. They may also offer reporting tools, spending controls, and rewards programs designed to meet the needs of business owners. A business credit card is best for covering everyday expenses and offers flexibility.
#4. Business lines of credit
Unlike a loan, a line of credit lets you borrow just the funds you need, when you need them, up to a given maximum amount. You can also pay off a line at any time, and you're only charged interest on the outstanding balance. Business owners typically use a line to supplement cash flow or for the flexibility to make purchases quickly. A line of credit is best for having a revolving source of funds on standby and can be unsecured or secured.
#5. Business term loans
Loans offer a lump sum of funds for a fixed term, typically for a specific business purpose. They may require a down payment, "balloon" payment, or other conditions, depending on type and terms. The interest rate can be a fixed or variable.
#6. SBA loans
This category includes a range of loan programs designed to support small business. While traditional lenders make the actual loans, the Small Business Administration (SBA) guarantees a portion of the loan against default, which helps business owners to secure funding. These loans can be used for a variety of purposes and terms, and there are even special programs available for different kinds of business and specific business owner communities.
Whichever type of credit you decide to pursue, talk to your banker first. They can play a valuable role in understanding your business's specific needs and helping you find the best choice for your business.
After considering all the important factors and making a thoughtful decision about the right type of credit for you, you can concentrate on preparing for the credit application process.