There are many ways to finance your small business if it’s time for a cash injection. Here’s the scoop on advantages that different types of financing entail, along with what kinds of risks to look out for.
Business Credit Cards
Similar to consumer credit cards, business credit cards offer a revolving line of credit with a set credit limit. You can apply for a business credit card at a bank, or through websites like www.creditcards.com.
Pros:
For business owners who don’t have solid credit history and can’t offer up much collateral, a business credit card (or a personal credit card) is probably the easiest way to access financing.
Credit cards are convenient. Funding is instant, so you can make purchases and access cash at a moment’s notice.
Cons:
Credit cards are expensive. They usually have higher interest rates than a bank loan or line of personal credit.
Your personal liability is at stake using a business credit card. Not being able to pay one off will directly impact your personal credit rating, as there is no such thing as a business credit rating.
And unfortunately, new consumer protections established by the Credit CARD Act of 2009 apply solely to consumer cards and not to business cards.
Interest rates can also be an issue. Unlike with bank loans, credit card interest rates can fluctuate greatly based on how you use your account and other factors.
Bank Loans
A bank loan is rather self-explanatory. It’s a fixed amount of money borrowed from a bank, paid off with interest.
Pros:
Bank loans have fixed interest rates, so you know exactly what you’re getting into when you use one. You will pay the same interest rate every month, and those rates are generally low.
Paying off your loan on schedule can have a very positive impact on your credit rating. That will benefit you in the future, as you’ll be better able to access financing the next time you need it, and possibly qualify for a bigger loan.
Cons:
Getting a loan is not fast and convenient. The application and approval process is often long and tedious, so you can’t really rely on bank loans for funding needs that are extremely immediate.
Your personal credit also plays a huge role in getting a bank loan. If it’s not stellar, you likely won’t be approved. Likewise, if you default, your credit will be tarnished and collateral you put up for the loan may be forfeited.
Personal Credit Lines
A personal line of credit is money obtained from a bank or credit union to be used as you wish. Funds are not spent with a card, but with special checks or by requesting a transfer to your account.
Pros:
Personal credit lines are flexible in that you don’t have to tell the bank or lender what you’re using the money for in order to be approved (as you would for a loan). You also don’t have to put up any collateral to get a line approved.
Interest rates for personal credit lines are generally low, and can potentially decrease if you pay more than the minimum amount you are billed for each month.
Cons:
As with other types of financing, lines of credit can be risky if you do not have the money to pay back your lending institution. You will need to have good credit history to get one.
Failing to make payments will result in strikes against your personal credit. In some states, you may also face collection costs.
According to the Consumer Financial Protection Bureau, not being able to pay back your personal credit line can result in your bank or credit union taking money directly out of other accounts you have with them. Credit card companies don’t have the ability to do this when you have a credit card, but banks and credit card unions do, if you have a credit line with them.
Kabbage Advances
Kabbage offers working capital that is deposited directly into your PayPal account the instant you are approved, or can be deposited in your traditional bank account within 3-5 business days.
Pros:
Kabbage has built the world’s fastest platform to provide working capital to small businesses, funding companies within 7 minutes. So if you need cash and you need it now, this might be your best bet.
Signup is fast and free, and you have no obligation to take money. With Kabbage, there isn’t any hidden cost or fine print. You don’t pay anything until you actually take an advance, and only while the cash is outstanding.
Customer information is handled by a third-party data security partner using the latest 128-bit encryption, so you can rest assured your information is secure.
The process of repaying your advance is simple. It’s done on a monthly basis over six months, but there is absolutely no extra fee for making an early transfer if you wish to pay it all off at once.
Cons:
A Kabbage advance is not free, but hey, there’s no such thing as a free lunch. As discussed above, the process of paying off your advance and any interest is made simple with a streamlined 6-month payment schedule. Customers do not pay any accruing interest.
So there’s your friendly financing lesson for the day. Now compare the pros and cons, and go fund your business!
