PrintQ: How can I make sure that I’m using the most appropriate credit vehicle for its respective business purpose?
A: Choosing the best business credit tools and resources requires understanding the sometimes subtle differences among the commercial credit cards, lines of credit, leases, loans, and mortgages for which your business can qualify. The better your understanding of each type of credit vehicle (interest rates, payback terms, etc.), the more likely you are to select the best one for your purpose and maximize its positive impact on your business.
Types of Business Credit
Business credit card: There is a robust assortment of business credit cards on the market today, and they remain the most popular way for small and mid-size businesses to finance startup and operating expenses, but they can also come with whopping interest rates and hidden fees. When sizing up credit cards, it’s probably smartest to get one with no annual fee, a low interest rate, and rewards that fit your business style and industry (i.e., cash back, no-interest balance transfers, or travel benefits). Plan to use the card exclusively for everyday business needs with the goal of paying off the balance each month. Pay close attention to the agreement, especially regarding what can trigger higher rates, what the default rate is, and how the lender defines “late payment,” and remember that credit cards can be some of the most expensive business financing available.
Line of credit: While a line of credit gives you the flexibility to pay day-to-day expenses or meet cash flow crises, whatever amount of money you use has to be paid back, and you pay interest on the outstanding balance. A line of credit may be secured or unsecured and usually has a lower interest rate, which makes it ideal to use when financing seasonal or other short-term needs such as acquiring inventory and buying equipment, and for working capital and other short-term borrowing needs. A credit line can be preferable to credit cards in times of falling interest rates and low inflation. However, a secured line is often based on a lien against property, meaning if you fail to pay off the debt, you can lose vehicles or your house.
Leases: They’re most commonly used for necessary business equipment purchases, such as automobiles, trucks, and vans; computers and technology equipment; office equipment, furniture, and fixtures; and construction equipment and the like. Leasing can reduce maintenance and disposition costs, preserve capital for other uses, and protect against equipment becoming obsolete. In addition to cost savings, there’s the added tax benefit that comes from reducing your overall payment totals. Additional benefits of leasing can include fixed terms and greater flexibility in payment terms and contract lengths. The disadvantages of leasing can consist of higher overall costs, loss of equity because you don’t own the equipment, and the fact that you’re obliged to pay the entire lease term even if you stop using the equipment. Some leases do give you the option to terminate early, but hefty fees will ensue.
Loans: Finding the right business loan usually rests upon the strength of your business plan, your cash flow projections, and the case you can build with the lending institution. Business loans, as opposed to credit cards or lines of credit, are usually destined for equipment purchases, financing of leasehold improvements, facility expansions, asset acquisition, and the financing of permanent working capital. But, like any other form of lending, the bottom line is how much money you’re seeking, when you plan on paying the lender back, and how much the lender can expect to make. Thinking from this vantage point will help you in making your case and finding a win-win loan situation. And, even if you don’t qualify due to lack of collateral or insufficient credit history, you may still be eligible under the guidelines of federally backed loans or grants such as those offered by the Small Business Administration.
Mortgages: When commercial property prices dip, it may seem like a perfect time to go out and buy a property for your expanding business, acquire financing to develop and construct or renovate a building or new office space, or find a warehouse to store your inventory. Commercial mortgages come in fixed and variable rates and durations. Do your research ahead of time to find out what to expect regarding price, down payment, your cash flow, and typical mortgage interest rates. Your current banker, industry peers, and commercial realtors can come in handy, too. Don’t be afraid to pick brains and shop around when it comes to choosing a commercial mortgage lender, especially during such competitive times as these.
The key to building and keeping a strong business credit rating is choosing a diverse array of appropriate credit vehicles and accounts that complements your business strategy, reflecting the strengths and respecting the challenges of your company’s needs and goals.
