Credit Management

Manage multiple credit types for different needs

Get to know how different types of credit may keep you on track with all of your financial goals.

Published: October 23, 2019

Businesses that have developed and proven their sustainability are typically no longer asking whether they can obtain financing: they’re looking at which types of credit make the most sense for their unique circumstances.

At this point, business leaders may find they’re able to support different needs by leveraging multiple credit products at once. But identifying the appropriate mix is crucial.

If you’re paying extra for funding, it will have a ripple effect, says Jim Olp, senior business consultant for the Denver Metro Small Business Development Center. “You may have to cut your own salary, or lay off an employee.”

Don't just mix credit products—match them

The main reason leaders seek to mix multiple types of loans is known as maturity matching, which entails complementing short-term needs with credit products like a line of credit or credit card, and long-term needs with products such as commercial equipment or real estate loans.

Consider the implications of using certain products for particular business efforts. For instance, Steve Milani, vice president, business cards and lines manager at Wells Fargo, points out, “You don’t want to use a revolving line of credit to buy a vehicle, because a revolving line of credit is designed for balances that the user expects to pay off relatively quickly, which may not be realistic in the case of a vehicle purchase, and the vehicle then goes down in value. That’s not a good match.”

Consider how you may fold these types of short- and long-term credit products together into a cost-effective financing strategy.

Short-term options

Line of credit: Used to navigate temporary budget crunches or spending surges. It’s not designed to shoulder long-term debts. It also provides assurance of a source for immediate funds, if needed.

Asset-based lending: Ideal for businesses that need a sizable influx of cash but expect to be able to recoup it quickly. For example, floorplanning is one type of asset-based loan, which enables retailers to stock showrooms before a holiday sales surge. There’s also factoring, which lets businesses borrow against their accounts receivable.

Asset-based loans can be a good option, Olp says, because they don’t depend on traditional collateral: floor-planning uses the merchandise as collateral; factoring uses the reliability of a business’s clients as the deciding issue.

Discover credit strategies for later-stage businesses:

Learn approaches to business credit for established businesses.

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Long-term options

Commercial equipment financing: Can help fund specific purchases such as construction equipment, commercial vehicles, or other large, depreciable capital assets. These loans will typically accept the asset being purchased as collateral to help lower the overall cost of borrowing.

Term loan: Useful in providing financing to businesses as they manage expenses associated with growth, such as adding employees or opening a new office. They generally have a fixed rate and set amortization schedule to provide transparency into the total cost of financing so you will know when the debt will be paid in full. SBA term loans are ideal for growth, including commercial real estate purchases, expansion, or partner buyout.

Specialty financing

Specialty financing is typically defined as lending done outside of a traditional financial institution. Given that environment, these types of lenders may take a different approach to assessing whether a business is a viable financing candidate. Because this form of lending may not focus on the same criteria as a bank would, there may be more flexibility in negotiating terms and pricing.

To carefully manage these products simultaneously without overextending them, business leaders should work with multiple internal stakeholders to review sales forecasts, business priorities, and external factors such as real estate, inventory costs, and the economic climate of their industry.

By leveraging a smart, tailored combination of financing products that help support specific goals, businesses can potentially position themselves for growth.