Obtaining Bank Financing for Your Business
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 basic challenges that all business owners face. One of the biggest is financing operations. In many businesses, revenue isn’t always consistent, which can create some challenging dilemmas for meeting obligations like payroll, vendor payments, and other bills.
Fortunately, there are a number of options 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 for you.
Bank financing is the most traditional financing method and is usually the first thought people have when they consider funding their business. Banks can finance business operations in a number of 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.
Loans are the most traditional type of bank financing. The bank loans you a specific amount, which you repay with interest over a predetermined period of time. 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 who have exceptional credit and a rock-solid business. Loans are more likely to be approved if the money is being used to expand an already successful business rather than to help a struggling business through a tight situation.
- May have lower interest rates
- Terms of the loan are clear from the outset
- Loan payments will be predictable
- Hard to get approved
- Bank may require collateral
- 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 an amount of credit to use 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. When you’ve paid down your line of credit, you can use it again.
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 that you access.
Lines of credit are good options for business owners who want to have flexibility with their loan repayment and credit that they can tap into in case of 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
- Can help you pay bills on time if you don’t have consistent revenue
Line of Credit Cons:
- Good to Excellent credit history required
- The lender will want to see strong business financials
- Interest rates may be higher on line of credit than on traditional loan
Business Credit Cards
Credit cards are certainly easier to access than either 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 loans or lines of credit, so your payments are going to be significantly greater. If the business doesn’t work out, you may be stuck with a pile of high-interest credit card debt.
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 that you have a big payment coming in a few weeks. Credit cards aren’t a good idea if you’re only going to 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 hurt your credit
- It May cause financial strain if you can’t pay them off quickly
Author: Marc J Marin