If you run a company you may need to borrow money from time to time. So how should you go about doing this exactly? There are many options, and we will be comparing two in today’s article. The first is the business line of credit, functioning very much like a credit card and must be paid back in a similar way. The other is the unsecured business loan. This is a way of borrowing for more generic business needs, rather than for a specific item.
A business line of credit works very much like a credit card. You must be approved for a set amount of credit, and then this becomes available to you. Unsecured business loans differ in that they are one time disbursements of cash.
The time it takes to get approved for both is close to the same. A line of credit may have a slightly higher interest rate, but will also be slightly easier to get approve on average. Typical unsecured business loans require you to demonstrate your intended purpose more clearly, and you may need to furnish some additional financial documents in order to get approved. Expect to have to demonstrate your credit history through your credit report as well as several years of revenue. If you have a new company, you should contact the local SBA chapter to try to get in touch with a lender that works with newer companies.
The relative cost of lines of credits vs. loans is somewhat harder to quantify and depends on a number of factors. As mentioned earlier, a line of credit typically has a higher interest rate, but you should take into consideration that you will only use these funds on demand, so you won’t be paying interest the rest of the time. In fact, if you get a line of credit with a grace period associated with it, you may not pay any interest at all, assuming that you pay off the balance in full each month during this grace period.
Unsecured loans can have a much larger scale though, so if you plan on making some major purchases in the near future it may in fact be the smarter of the two choices. Like I said, the relative cost depends on a number of factors. As always I recommend you seek professional assistance before choosing any one option.