Business Owners -
One of the most important tools available to you is your business's credit. The
resources required to grow your business often exceed the available cash flow. This
is a very common situation and how you handle it can determine the ultimate
success or failure of your business.
In order to grow consistently, stay ahead of the competition, and maximize profit,
businesses need a ready supply of credit. Few businesses generate the steady cash
flow required to get their best results. A small business credit line can provide the
resources required to sustain continued growth.
There are several ways to ensure a business will always have the credit and resources
they need to achieve their goals. These can be used alone, or in combination in order
to meet the individual needs of the business. All the following credit sources have
their benefits, but some are a better fit than others for a particular business or
organization. Many businesses use varied lines of credit, both secured and unsecured.
No one credit line is best for every situation. Having multiple credit sources available
let a business tailor their credit profile to be perfect for their unique business
requirements. Since no two businesses are the same, it follows that different
businesses will benefit from different credit mixes.
Credit allows businesses to operate more efficiently, and take advantage of cash and
prompt pay discounts, and special buying opportunities from vendors. Credit is a
sort of financial lubrication that makes business operate more smoothly. Many
vendors have special programs that can dramatically increase profitability, if only the
business is positioned to take advantage of them. Make sure your business doesn't
miss out on such opportunities.
Other vital uses for credit in most businesses include improving cash flow,
purchasing materials or equipment for growth, expansion, financing A/Rs, acquiring
temporary or seasonal working capital, and financing extraordinary inventory
purchases. Following is a comparison of different types of small business credit
|A Comparison of Small Business
Unsecured Small Business Line of Credit
The quality of lenders and terms varies widely on unsecured small business lines of
credit. Businesses with little credit history or bad credit may still be able to get such
credit lines, but be prepared to pay substantial fees and high interest rates to do so.
On the other hand, businesses with proven credit worthiness over time may get very
attractive terms for such lines of credit.
Small Business Line of Credit Advantages -
- Flexibility - As with any line of credit, you only use the credit you need, while
holding the rest in reserve.
- Increased cash flow - Because it is a line of credit, and not all the money is
withdrawn at once, the businesses' payments are smaller. Obviously, this helps
cash flow, a vital component of almost any business.
- Interest payments are only made on the outstanding balance.
- No collateral is required. No personal property or real estate (such as personal
homes) must be pledged against the credit line.
Small Business Line of Credit Disadvantages -
- Can sometimes have more restrictions than a loan as far as outstanding
- Can have higher interest rates than a secured credit line or loan
- Can be difficult to obtain
- Can have relatively expensive application, maintenance and/or account fees.
Small Business Loan
Loans are probably the second most common source of small business financing,
after credit cards. This is important because every business is different and no two
small businesses have the same loan requirements.
Small Business Loan Advantages -
- There are many sources of small business loans, and they are relatively easy to
obtain. A bank loan is typically the most difficult to qualify for, while a finance
company loan is generally the easiest.
- Some are secured by the government, making their requirements and interest
rates lower than some other forms of financing.
- Loans are available in varied amounts, up past $1,000,000.
- SBA loans are available for business with little track records.
- Long repayment terms - SBA loans
- Inexpensive - bank loans
Small Business Loan Disadvantages -
- A bank loan can be very difficult to qualify for. For a new business, they are
next to impossible. This can even be true of government SBA-backed loans.
Be aware that even with SBA backed loans substantial collateral can often be
required, such as the borrower's primary residence. This is true even though
the lender is protected by a federal government guarantee against possible
- Short repayment terms - bank loans
- Expensive - finance company loans
- Inflexible - Fixed loan amount, fixed payment
- Higher monthly payment than a credit card or line of credit because you are
obligated to take the entire amount of the loan. For example, even if your
immediate cash needs are $25,000 and you get a $50,000 loan, you make
payments on the entire $50,000. With a credit card or line of credit, you can
get a high credit limit, but only use it when the need arises.
Business Credit Cards
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Credit cards are an extremely common source of small business credit. Many small
business owners have numerous credit cards for general purchases, or specific,
recurring uses, such as fuel and miscellaneous parts purchases. In addition, many
new small business use credit cards as their exclusive credit source. Many small
businesses were started using the owner's personal credit cards for financing before
transitioning to business cards.
Business Credit Card Advantages -
- Very flexible
- Easy way to track small expenses
- No collateral
- Easy to qualify for
- Fast approval
- Immediate business line of credit
- Special benefits, such as airline miles, hotel rooms, vehicle purchase credits,
and other points based bonuses
- Insurance, travel assistance, and other protections are included with many
small business credit cards.
Business Credit Card Disadvantages -
- Relatively expensive credit - Business credit cards are unsecured and tend to
have higher interest rates than some other financing.In addition, some cards
have significant annual and other fees borrowers must be aware of.
- Short term
- Relatively low credit limits - Although business credit cards typically have
relatively low credit limits compared to other forms of small business credit,
certain cards do have very high limits, in certain cases up to $100,000. This
may not be sufficient for financing a major capital improvement, but it can be
effective for other financial requirements.
It's extremely common for small business owners to obtain a vendor credit line. In
many industries credit terms from vendors are the most common financing source.
Vendor Financing Advantages -
- Free credit
- Easy to qualify for
Vendor Financing Disadvantages -
- Very short term (Typically 30 - 60 day terms)
- Inflexible - can be used only for purchasing the issuing vendor's inventory
- Vendor financing an cause inventory and supply problems when the credit line
is exceeded or terms aren't met. In the case of credit problems, the vendor
may refuse to ship your business the products it needs to operate.
Credit can be one of the most important aspects of running and growing a successful
business, large or small. It's important to create the proper blend of different credit
sources that maximizes the profitability of your small business. Just as all small
busineses are different, so too shall every business's credit mix be a bit different.
Carefully examine all sources of credit available to you as a business owner. Weather
you use a line of credit, a loan or other credit types, you will be able to develop the
best mix of small business credit to take your business as far as possible.
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Small Business Credit
How Credit Can Take Your Small Business Farther Down the Path to Profit
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