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What are the Different Business Lines of Credit, and Which One is Best for Your Business?

February 21, 2022/in Financing, Manage Your Money/by Vince Calio

Business lines of credit are incredibly valuable tools that offer flexible financing to help small business owners meet expenses and grow. Lines of credit, much like your personal credit card, have borrowing limits and make funds available to you when you need them. They also give you the option to pay down some or all the debt at various, pre-agreed upon intervals. You only pay interest on the amount that you’ve used, and most lines of credit will require you to bring your balance to zero at certain times.

The benefits of having a line of credit are tremendous, and in some cases, businesses may not be able to survive without one. For example, seasonal businesses may use a line of credit to meet payroll during the off-season or to order inventory in advance of their busy seasons. Credit is also used in case your small business quickly needs emergency cash.

Before you apply for one, however, you should consider that a line of credit is not a one-size-fits-all product. There are different types of lines of credit that you should consider before deciding on which one is best for your business. Some credit lines may offer higher lines of credit while others may require collateral..

Deciding on the right one for your business can be tricky, and it’s important to know the different types that are available to you, as well as the risks associated with each one:

#1 Secured Line of Credit

A secured business line of credit is one in which you, the borrower, take on a significant amount of risk. In these types of credit lines, you will have to put up collateral, such as your business assets, personal savings, or surplus business cash; or, if your business is a pass-through business, your personal assets such as your home. In the event you can’t pay off your balance, the lender reserves the right to seize those assets.

That said, there are distinct advantages to a secured line of credit over an unsecured line. First, since you’ve put up collateral, there is a good chance that your line of credit will be bigger than it would be with an unsecured line of credit. Second, since you’re the one taking on much of the risk with a secured line, you most likely will pay less interest. Third, you don’t typically need as high of a credit score as you would with an unsecured line of credit.

#2 Unsecured Line of Credit

An unsecured business line of credit is the more popular option for small businesses since this option requires no collateral, and the lender takes on most of the risk. Applying for an unsecured line of credit is often simpler than a secured line, and approval may be quicker.

An unsecured line of credit typically carries the same payment requirements as a secured line of credit, but in exchange for taking on much of the risk, the lender will usually require a strong credit score to obtain one. Since it is unsecured, the spending limit may not be as high as a secured line of credit, and the interest rate may be higher than a secured line of credit.

#3 Business Credit Card

If you need to pick up the tab for a business meal or must purchase new office equipment such as a laptop computer or printer at a moment’s notice, a business line of credit would not be convenient for you since it could take days to transfer money from your line of credit to your account. A business credit card, however, is a very handy tool to fulfill immediate cash needs for your business.

A business credit card works pretty much the same as a personal credit card – it could offer perks such as travel miles and cashback rewards and will be there when you need it. Business credit cards usually have fewer requirements to obtain than a line of credit, and they won’t tie up your personal assets as they don’t require collateral.

The drawbacks compared to a line of credit, however, is that business cards usually carry a higher interest rate than a line of credit, and many of them charge an annual fee.

#4 Real Estate Line of Credit

If you’re in the business of buying and selling properties, such as a home flipper, for example, then you should consider a real estate line of credit. A real estate line of credit is similar to a home equity line of credit, which is credit based on how much equity you have invested in a piece of real estate.

Real estate lines of credit work in a similar way to any other lines of credit. They can be either secured or unsecured, depending on your FICO score, and they allow you to buy a piece of property before you sell your existing property.

Choose Carefully

Before you decide to take out a business line of credit over another form of financing, you should carefully consider the reason you need to borrow money in the first place. Lines of credit are probably not good for long-term business needs such as the purchase of expensive but crucial equipment or an office lease, and typically carry higher interest rates than other short term financing products.

If you have immediate cash needs or want cash available in case there’s an emergency, such as your air conditioner breaking down or a leaky roof in your office, then a line of credit is probably the best solution for you.

Business Loan vs. Business Credit Card?

January 7, 2020/in Financing, Manage Your Money/by Wil Rivera

Business Loan vs. business credit card how do you decide which is best for you?

When it comes to financing, entrepreneurs and small business owners continuously debate business loans vs. business credit cards. In many cases, the final decision comes down to the state of the business, relevant market conditions and what makes the most sense for the company’s long-term strategic objectives.

Before weighing in on the debate, here’s a brief description of each financing option:

Business loans

Business loans can boost your cash flow on both a short- and long-term basis. Short-term loans are good to cover unexpected expenses. A traditional term loan enables you to take on larger projects, without harming cash flow.

For business owners with great credit, stable revenue, and a solid business plan, a business loan can be a great option.

Credit card

A business credit card gives a small business owner instant access to cash. It doesn’t come in a lump sum as with a loan, but rather as a set amount of funds available when and as needed.

Interest rates with a credit card are generally higher than with a business loan, but by paying each month’s bill in its entirety, this isn’t a concern. Often, the appeal of business credit cards is enhanced by various perks, purchase protections and rewards.

Business loan pros and cons

With business loans, a borrower often has a voice in determining the frequency and flexibility of payment deadlines. Payment frequency may be based on existing cash flow, or you can pay back larger amounts without prepayment penalties.

In general, a business loan works best for companies in need of working capital for investment to in large-scale expansion opportunities, such as equipment purchase, hiring more employees or launching a new location, etc. It’s also useful in refinancing an existing business debt.

On the other hand, with traditional lenders, business loans “can be more difficult to qualify for, and the lending process can take weeks or months,” according to The Ascent at Motley Fool.

Credit card pros and cons

With a business credit card, a sole proprietor or ambitious entrepreneur enjoys rapid availability to money needed to finance operations. It’s also a viable option if you wish to make ongoing purchases or regularly incur significant expenses (though, as noted, it’s best to repay in full each month).

There’s a great deal of psychological comfort in knowing you have access to funds if and when your business needs them.

At the same time, the APR (annual percentage rate) for a credit card can sometimes be as steep as 20%, which adds up. Also, if your business experiences an unforeseen dip in cash flow, you may find yourself facing considerable (and growing) business debts, due to high interest rates. And in some cases, there’s an annual fee to keep a card account open.

Finally, a business that borrows money up to the pre-assigned credit limit and still needs funds can find itself in a tight spot.

Loan options to consider

The good news about business loans is it’s no longer mandatory to go to a bank for a traditional loan. Funding options includes:

Online loans. Requirements are less strict for these stand-alone cash flow loans. But, revenue stability and a strong business plan are essential for approval.
SBA loans. In fact, the SBA (Small Business Administration) doesn’t loan money itself, but the government-backed agency does agree to back a certain percent of the loan, which makes it easier to obtain loan approval elsewhere.
Purchase order financing. This is a short-term loan covering up to 100% of supplier costs. The key factor is whether a big order is just about to close. Following the sale, the lender’s fees are deducted from the proceeds.

Still more alternative types of loans include equipment financing, invoice factoring, revenue-based financing, and business lines of credit. A fuller description of these options can be found here.

Taking time to debate a business loan vs. business credit card is important. No business can afford to delay making a final decision. The good news for small businesses is that there’s a wealth of financing opportunities available that help keep the dream of business growth a genuine reality.

Are Credit Card Cash Advances Bad?

February 1, 2019/in Financing, Manage Your Money/by Bernadette Abel

Do you use your credit card to make withdrawals for your business? If so, you might be making an expensive mistake.

Whether it’s a business card or a personal credit card, it’s time to think twice about using your credit card as a debit card. Here’s what you need to know.

4 Reasons to Think Twice About Using Your Credit Card for Cash

Withdrawing money via your credit card could be costly for these four reasons.

1. Cash Advance Fee

It costs more to borrow cash from your credit card than to make a purchase using your card because of what’s known as a “cash advance fee.” Depending on the terms in your agreement, credit card issuers could charge you either a flat rate fee or a percentage fee of the withdrawal amount — whichever is greater.

2. No Grace Periods

Like personal credit cards, business credit cards usually offer a grace period. A grace period is the time period between the end date of a billing cycle and your next credit card due date. Cash advance transactions typically do NOT have a grace period. Instead, interest begins accruing immediately upon withdrawal, resulting in a higher total interest charge on cash advances than you’d see on a purchase transaction.

3. Higher Borrowing Rates

Another expense to consider with a credit card cash advance are the potentially higher interest rates. Interest rates on cash advances may be higher than the rate charged for purchases on the card. Refer to the fine print in your credit card agreement or contact your card issuer for more information.

4. Potential Unlimited Personal Liability

Does your business credit card have a personal liability clause?

If you’ve provided a personal guarantee for your business credit card , you’re personally on the hook for paying off that credit card debt if your business fails. That debt could include all the cash advance withdrawals from that credit card. This is the case even if the way you’ve incorporated your business (for example as an LLC) protects your personal assets against business litigation.

How to Calculate Your Credit Card Cash Advance Cost

If you’re wondering just how much a credit card cash withdrawal could cost, here’s how to figure it out

Calculate the initial cash advance fee based on the withdrawal amount. For example, the fee on a $3,000 withdrawal from a card with a 3% cash advance fee is $90.00.Next, calculate the interest charges. Divide the annual percentage rate (APR) for cash advances on your card by 365. Then multiply that figure by the number of days you’ll carry the balance and the withdrawal amount. Based on the example above, a $3,000 advance at an APR of 21% for seven days, the calculations look like this: 21/365 = 0.00274 daily interest x 7 days = 0.019178 x $3,000 = $75.53.Add the interest charge to the credit card advance fee for a total cost of $165.53 (90 + 75.53) in charges and interest to take a $3,000 cash advance for seven days.

Alternatives to Business Credit Card Cash Advances

Luckily, there are less expensive ways to borrow money for your business.

A business line of credit gives access to funds as needed, and you’ll only pay interest when and if your business uses it.
Equipment Financing and short term loans often have comparatively low rates, especially when they’re secured against collateral such as real estate, equipment, or machinery.
Other business financing options include borrowing against your accounts receivables and invoices through revenue-based financing or invoice factoring; invoice factoring is a good option for subcontractors,.

Look into the other business financing options available to you before taking a credit card cash advance. Doing so could save your business a bundle.