Small business credit needs are very different from large-company capital requirements. That’s why a community-focused bank with community insight and local roots often has a better understanding of the many variables that impact local businesses, and can put that knowledge to good use when helping to meet credit needs. Here are three solutions to small business credit needs that will help you keep working capital doing what it should: working to generate profits and local jobs!
Covering Short-Term Needs with a Revolving Line of Credit
Think of a revolving line of credit as working capital on tap, always accessible the moment you turn on the proverbial faucet. Use what you need, and go back to the reservoir when short-term needs arise, paying interest only on the amount you use. The most common uses for a revolving line of credit are for covering payroll, bridging seasonal slowdowns, smoothing out accounts payable and accounts receivable cycles or taking advantage of unexpected opportunities to purchase inventory at particularly favorable prices. Lines of credit are typically secured by your receivables, fixed assets and inventory.
The flexible nature of a revolving line of credit, along with the lower costs compared to term loans, makes it an ideal funding source for small businesses, including building up your credit history with the bank. You may want to consider applying for a business credit line even if you have no intention of tapping into it right now. The capital will be there when you need it and, until you do, you will not have any interest costs.
Planning for the Long-Term with an Installment Loan
If you are considering getting a business loan, term loans, or installment loans, are ideal for longer-term capital needs, from commercial mortgages to investments in new equipment and vehicles. These types of loans require a business owner to have a specific purpose for the money, such as a building or equipment purchase, renovating and upgrading facilities or a fleet expansion. Typically this type of business loan will range from three to seven years, except for commercial mortgages which are typically 15 to 25 years, and benefits include the peace of mind of a fixed-amount, monthly payments and possible deductible interest expenses.
Term loans aren’t a good choice for short-term needs. After all, you don’t want to carry debt for new IT equipment well beyond the time that it becomes obsolete. A term loan can, however, be an excellent option when it’s time to expand or upgrade your company’s work truck or sales fleet, for example. Many times attractive dealer finance rates disappear if it’s a commercial deal, or if the vehicles will be outfitted with special equipment. A business term loan may just be the right solution to keep your crews and staff moving and business growing.
Reaping Rewards with a Business Credit Card
Many business owners I talk to question the wisdom of using a credit card to fund business expenses, but if you apply for a business credit card there are benefits. It’s not unlike establishing a revolving credit line – you have a set limit of cash available and as long as you pay at least the minimum amount each month you can continue to incur charges. Paying off the full amount each month gives you an ongoing credit line, potentially interest-free at that. Even better, business credit cards generally offer you the opportunity to earn valuable rewards, including cash back or points you can use to purchase air travel or products. Don’t discount this option – it can be a valuable part of your working capital strategy and credit history.
What’s Right (or Wrong) for You?
Each option is right (or wrong) for very specific reasons. To make sure that you’re considering the best solution for your specific small business credit needs, make an appointment with your business banker to discuss the pros and cons. They’ll also counsel you on the business loan process, which will shed light on the required data, documentation and due diligence that is necessary versus a typical consumer loan.
I’ve been working with small business owners locally here in Connecticut for over a decade and while it may sound self-serving, it really does pay to sit down with your business banker and evaluate your options before you start the application process. For example, one common mistake that many entrepreneurs make is to underestimate capital requirements over the long term. If you secure a revolving credit line and utilize it for longer term purchases, for example a vehicle purchase, then discover that accelerated growth or changing market conditions require, say, the need for short term working capital, converting to a term loan could cause you to pay interest twice. And, while rates continue to be very low for the time being, no business owner needs the burden of unnecessary interest expense.
Taking the long-term view of your capital needs right now may just position your business for future success. Can you imagine what your business might look like in the 22nd century? With 150 years of history under our belt, it’s a scenario we’re not unfamiliar with – just ask the folks at the Danbury Square Box Company. Your business won’t be the first that we’ve assisted with small business credit and helped grow for multiple generations.
