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Some entrepreneurs start out by funding their business out of their own pockets or through a personal line of credit. This may not be by choice, but simply because these new business owners aren’t aware of the best loan options or because they worry that their new business won’t qualify for a loan. In reality, there are many great funding options for small businesses and almost all business owners can find a type of financing that works for them.
1. Revolving Lines of Credit
When you’re just starting out or even after you’ve been in business for awhile, you might not know exactly how much money you’ll need. In fact, you may just want to get a loan preapproval just to make sure you have access to working capital in case you need it. A revolving line of credit may be the best option in this situation because it’s flexible and convenient.
With revolving credit, you can borrow as much as you need, up to your preapproved credit limit. Your interest and payments depend on how much you borrow, so you won’t have to pay interest on money that you don’t borrow. On the other hand, it’s handy to know that you can access funds when you need them so you can manage cash flow. Another advantage of revolving credit is that you always have funds to draw upon up to your credit limit, once you’ve paid back what you’ve borrowed and any interest you’ve been charged. You can access revolving lenders through many different finance companies, including online lenders.
2. Term Loans
If your company has already been established for a few years, you might qualify for a term loan at a bank or with an online loan company. These loans are usually for large, fixed purchases and they might have terms of less than three years or up to twenty years. In order to get a large or long-term loan, businesses usually have to fill out extensive documentation, have a good credit history and they must sometimes offer collateral to back the loan.
Because finance companies offer term loans to established businesses and may require collateral, they usually have low interest rates. Because they’re for fixed amounts with a set repayment schedule, they’re also usually used for larger investments. Typically, a business might take out a term loan to buy expensive machinery or to purchase another business.
3. Business Credit Cards
Credit cards offer a type of revolving credit, but they aren’t exactly the same as a revolving line of credit. With a line of credit, you can actually get cash deposited into your account. With a credit card, you generally only use it to charge purchases or pay bills. It’s possible to get a cash advance from some credit cards, but the interest rates may be higher for cash advances than they are for credit lines.
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Which Lending Source is Best for Your Business?
The right type of loan ultimately depends upon your unique business needs, your company’s credit history and your plan to manage debt. Many business owners believe that it’s prudent to establish a revolving line of credit in case they need cash to exploit a chance to grow their revenues. Term loans may be better for large, fixed expenses, and most lenders only consider more established companies. Finally, credit cards may be most helpful for charging certain business expenses.
Business owners used to think of banks as the main source of business funding; however, many of these traditional finance companies have tightened their lending rules. Increasingly, alternative lenders like internet loan companies have entered the market with fast online applications and, in many cases, more flexible approvals