Obtaining Bank Financing for Your Business
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Running your own business can be one of the most exciting and lucrative projects a person can undertake. As exciting as running your business may be, there are some fundamental challenges that all business owners face. One of the biggest is financing operations. In many companies, revenue isn’t always consistent, creating challenging dilemmas for meeting obligations like payroll, vendor payments, and other bills.
Fortunately, several options are available to keep your business running through any business cash crunch. We’ll cover some of the most popular financing options and help you determine which option is right.
Bank Financing
Bank financing is the most traditional method and is usually the first thought people have when considering funding their business. Banks can finance business operations in several ways. Regardless of which type of bank financing you pursue, you should be fully prepared to explain your business, show records of its past success, and present expected future revenue. Banks want to feel confident that you will repay their loan, so you should do everything possible to present yourself and your business professionally.
Business Loans
Loans are the most traditional type of bank financing. The bank loans you a specific amount you repay with interest over a predetermined period. If you fail to repay the loan, the bank can take any assets you have put up as collateral.
Banks have become very picky in approving businesses for traditional loans. A bank loan is best for business owners with exceptional credit and a rock-solid business. Loans are more likely to be approved if the money is used to expand an already successful business rather than help a struggling business through a tight situation.
Loan Pros:
- May have lower interest rates
- The terms of the loan are clear from the outset
- Loan payments will be predictable
Loan Cons:
- Hard to get approved
- The bank may require collateral
- The bank may want to see personal investment from the owner
Business Lines of Credit
A line of credit is similar to a loan in that the bank extends you credit for your business. The difference is that you don’t have to use all the credit at once. You can take it as you need it. Your payments back to the bank will fluctuate depending on how much of the credit line you have used. You can use it again when you’ve paid down your line of credit.
The same qualification rules for loans also apply for lines of credit. Banks look for exceptional credit history and solid business history just like they do for loans. They want to be sure that you will repay whatever portion of the line of credit you access.
Lines of credit are good options for business owners who want flexibility with their loan repayment and credit that they can tap into in an emergency. They may be a good fit if you don’t need a significant amount of credit upfront but may need credit in the future.
Line of Credit Pros:
- Flexible. You can use as little or as much as you want.
- Work as good emergency funds
- It can help you pay bills on time if you don’t have consistent revenue
Line of Credit Cons:
- Good to Excellent credit history is required
- The lender will want to see strong business financials
- Interest rates may be higher on the line of credit than on a traditional loan
Business Credit Cards
Credit cards are easier to access than a traditional loan or a line of credit. Even with a fair credit history, most individuals can get approved for a credit card.
While credit cards are readily available, they may not be the best choice for financing a business. Interest rates on credit cards are usually much higher than on loans or lines of credit, so your payments will be significantly greater. You may be stuck with high-interest credit card debt if the business doesn’t work.
Credit cards are good options if you know you will be able to pay off the card in a short time frame. For example, you may want to use a credit card to buy inventory if you know a big payment is coming in a few weeks. Credit cards aren’t a good idea if you only make the minimum payment on the card.
Credit Card Pros:
- Easy to access
- Quick approval
- Accepted by nearly all vendors
Credit Card Cons:
- High-interest rates
- Can negatively impact or hurt your credit
- It may cause financial strain if you can’t pay them off quickly