Do you need funds for your small business? While there are numerous ways to secure financing, the two most popular options are small business loans and business lines of credit. The type of financing you choose depends mostly on your needs and the financial stability of your business.
What’s the Difference Between a Small Business Loan and a Business Line of Credit?
Before heading to your local bank or scouring online lending sites, you need to know the difference been a small business loan and a business line of credit.
If you have a home mortgage, you’re probably familiar with a term loan. A small business loan is similar to a mortgage since you receive a lump sum of money once your application is approved. You pay back the loan over a set period and make payments according to a set schedule.
Lines of credit are similar to a credit card. With a line of credit, you get approved for a certain amount of money that you can draw from when you need more working capital. You only pay interest on the money that you use.
Consider a line of credit if you:
- Need Ongoing Access to Funds
- Want Flexible Payments
Consider a small business loan if you:
- Know Exactly How Much You Need to Borrow
- Want a Set Repayment Schedule
What is a Small Business Loan?
Small business loans are a cost-effective option when you need financing for an established business. Start-ups typically don’t qualify because lenders often require a business to be in operation for at least one year.
Small business loans are an attractive option because you’ll know the total replacement cost and payment schedule upfront. This makes it easier to manage your budget over time.
Depending on your needs, you can choose between short-term or long-term business loans. If you need working capital for business inventory, you might consider a short-term loan with a six to 24-month repayment schedule. Constructing a new building requires more capital and is best suited for a long-term loan, which typically lasts three years or more.
You’ll also need to choose between a secured or unsecured small business loan. With a secured business loan, you’ll need to have something to use for collateral. If you’re unable to repay your loan, the lender will take your collateral.
If you’re not willing or able to take the risk, an unsecured small business loan could be a better option. Although you won’t have to put up collateral, your interest rate may be higher than a secured loan.
How Do I Get a Small Business Loan?
Once you select your lender, you’ll likely need to provide business documents such as tax returns, bank statements, and cash-flow statements.
Although underwriting guidelines vary by lender, they will typically consider your:
- Personal Credit Score
- Length of Time in Business
- Annual Revenue
- Cash Flow
- Ability to Repay the Loan
You may not qualify for a small business loan if you have not been in business for very long or have a low credit score. However, if your business has been operating successfully for several years and you have a high personal credit score, you may qualify for lower interest rates and have more financing options.
What About Small Business Administration Loans?
The Small Business Administration (SBA) is a government agency that works with lenders to help small businesses get loans. Rather than lending money directly to a business owner, the SBA sets guidelines for small business loans from partnering lenders, micro-lenders, and community development organizations. Because of this, SBA loans are less risky for lenders and can be easier for small businesses to obtain.
A few of the benefits of SBA loans include:
- Rates and Fees Comparable to Non-Guaranteed Loans
- Lower Down Payments
- Flexible Overhead Requirements
- Often No Collateral
- Business Counseling and Educational Opportunities
What is a Small Business Line of Credit?
If you have evolving needs, a small business line of credit gives you access to funds whenever you need more working capital. When you’re approved for a line of credit, you will:
- Borrow What You Need, When You Need It
- Make Minimum Payments
- Pay Interest Only on Your Balance
You can borrow money until you’ve reached the limit for your line of credit. Once you pay some or all of the balance, you can continue to borrow money as long as the line of credit is open—and your account is in good standing.
Business lines of credit offer more flexibility than small business loans in regards to payment schedules and access to funds. Many lenders allow you to make only the minimum payment, pay the balance in full, or pay any amount over the minimum payment. This flexibility is beneficial if your cash flow varies from month to month.
Depending on the vendor you choose, you may be able to access your line of credit by writing checks, using a debit card, or transferring funds to your business checking account.
How Do I Get a Line of Credit?
Like small business loans, a line of credit requires you to provide a lender with documentation including personal and business tax returns, bank statements, profit-and-loss statements, and balance sheets.
To qualify for a line of credit with a traditional lender like a bank, you’ll need consistent business revenue or collateral. Many traditional lenders will only consider lines of credit for businesses that have operated for at least two years, although this varies from lender to lender.
If you choose to work with a non-traditional lender, such as an online bank or lender, you may be able to qualify for a line of credit as long as you’ve been in business for six months and have $25,000 in annual revenue, according to Nerd Wallet.
Regardless of the lender you choose, you’ll likely need a credit score of 500 or higher to qualify for a business line of credit.
Are you interested in learning more about small business loans and lines of credit? At TRV Funding, we work with many types of businesses in a variety of industries. Since our founding, we’ve helped our clients secure over $2 billion in small business loans!
Contact us today to find out how we can help grow your business by calling us at (844) 487-8878. You can also use our simple online application to see if you qualify for funding and receive a free instant quote!