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Loans, lines of credit, and credit cards are like all good financing tools — they deliver the most benefit when they’re used for the right job. Your timing, plans for tapping funds, and what you intend to buy are just a few of the considerations when you choose a financial tool for your business.
Learn about what you should consider before deciding which financing option best suits your business’ needs.
Loans provide a lump sum that you repay on a fixed schedule, often over several years. This makes them best suited for funding one-time investments that will generate additional revenue or cost-savings long term, such as equipment, vehicles, or a larger facility. For example, a bakery might use a loan to buy an extra oven that will help increase production, with the expectation that the purchase will fuel revenue growth that will help it repay the loan.
The interest rates on term loans are either fixed — they stay the same throughout the life of the loan — or variable, meaning they may fluctuate.
Your credit score may also be a factor in the interest rate you’re offered. Businesses that don’t meet conventional lending guidelines may qualify for a Small Business Administration (SBA) loan, a portion of which is guaranteed by the government. While SBA loans may offer advantages such as longer repayment terms and lower down-payment requirements, the application process is often lengthier.
A line of credit for your business lets you access funds as you need them. You pay interest only on what you withdraw; as you repay the funds, they become available for use once again. Unlike term loans, which are typically used for long-term purchases, lines of credit are often used to handle short-term needs while you wait for customer payments to arrive. For example, if your company has been hired for a long-term project and needs to buy materials and hire contract workers before you are paid, you could draw on the line of credit to pay your expenses and repay the funds once the client pays you.
Lines of credit typically have variable interest rates. They must also be renewed, usually every year. As with a loan, lenders will check your credit score and may review your financial documents before deciding whether you qualify.
One source of funds that is relatively accessible to many businesses is a business credit card. Like lines of credit, these offer a set amount of revolving credit; you may spend up to the set limit, but funds become available again as you repay them. They often carry higher interest rates and are best used for day-to-day expenses, such as office supplies, travel, and incidentals. If you are meeting a client across the country, for instance, you could book your flight and hotel using a credit card; if you can pay off your next statement in full, the “float” (grace period you’re given to pay off your balance) on the credit card allows for short-term borrowing at no interest. Also, don’t overlook the bonus potential of cards that offer points or cash rewards. These can add up quickly to help fund travel or workplace perks.
Using credit cards can also make it easier to track and manage expenses. Most issuers send year-end spending reports that are helpful at tax time. If you choose to give cards to some employees, you can often set limits on the size and nature of their transactions.
We are committed to helping your business reach its potential. Our dedicated business banking professionals can help you find the right product to meet your business’ needs. To learn more, please call 1-800-428-7463, visit us online, or visit your nearest Citizens Bank branch.
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