Lines of Credit, Loans or Credit Cards: Which Is Right for Your Business?
Your small business must adapt to changes and maintain operations during seasonal fluctuations or uneven cash flow. Business lines of credit offer access to flexible funding that can meet your immediate monetary needs.
Line of Credit vs. Business Loan
A credit line for your organization is different from traditional lending types. Unsecured credit lines give you the ability to withdraw money from a predetermined cash limit. You choose how much you take out and pay interest only on that amount. Small business loans provide a lump sum of money that you deposit into your account. You repay the funds with a set monthly payment.
Loans are a practical option when you need to fund significant purchases, such as:
- Real Estate
- Construction projects
- Equipment or machinery
Lines of Credit:
This finance method is best when you need help with short-term needs, like:
- Making payroll when revenue decreases
- Buying office supplies
- Purchasing needed inventory
- Working capital during your seasonal changes
- Repairing workplace equipment
- Paying for advertising
Credit Lines vs. Credit Cards
The revolving funds of a credit line are similar to a business credit card. Interest accrues on the money you draw, and the amount is available for re-use once you pay it back. There is a set limit on the amount of money you may borrow. However, there are differences between the two borrowing methods.
Credit cards are more expensive than a credit line, and the higher interest rates can fluctuate, making the repayment amounts vary. Credit lines have lower fixed rates, offering predictability with your borrowing. Credit cards also present more security issues than credit lines.
Secured vs. Unsecured
Banks offer secured and unsecured credit lines for small businesses. Secured funding means you have to put up collateral to back the loan. When you offer assets as collateral, lenders take on less risk and may provide you with higher credit limits. Unsecured debt does not require collateral but may have variable interest rates and lower funding limits.
Benefits of Business Credit Lines
If you maintain your line of credit and keep it in good standing, your credit score improves. Having a better credit rating helps you qualify for other lending methods when you want to expand or otherwise grow your company. If you pay off your credit line debt quickly, you can start building a solid credit profile.
Regulating your cash flow and keeping your finances in check are essential aspects of running a successful operation. Lines of credit can help you facilitate growth.