Borrowing money is par for the course when you run a small business – emergencies arise and opportunities pop up, and both require quick access to cash. For many small business owners, it’s a toss-up between taking out a line of credit or putting expenses on a credit card. Deciding which funding method makes sense for you depends on your credit score, funding needs and the type of business you’re running.
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What is a line of credit?
A line of credit is a revolving loan that allows business owners to draw down money as they need it. The money can be used to address business expenses or to bankroll growth. There is no lump sum disbursement with a revolving line of credit, it works like a credit card. You only pay interest on the money you use.
How does a revolving line of credit work?
A revolving line of credit is a business loan that you can continually drawdown and repay. The credit limit on lines of credit typically range from $1,000 to $250,000, although some lenders will go even higher.
A small business line of credit is renewed annually, with interest accruing once you draw down money. Most have a variable interest rate, which means it changes with the prevailing interest rate in the market.
To obtain a line of credit, you and your business undergo a credit review in which your credit history is picked apart. That will determine the interest rate and credit line. In some cases, a personal guarantee is required to win approval for a revolving credit line.
“Lines of credit are harder to get than a business credit card,” said Ted Rossman an industry analyst at CreditCards.com. “You have to be in business for at least three years and have at least $250,000 in annual revenue. Some online lenders lower the threshold.”
What are the types of lines of credit to consider?
There are two main types of business lines of credit: secured and unsecured.
- Secured lines of credit require the business owner to offer collateral. If the debt goes unpaid the lender gets the piece of equipment or real estate. Secured lines of credit tend to have higher limits and lower interest rates because you have skin in the game. Secured lines of credit are required for funding of more than $100,000.
- Unsecured lines of credit don’t require you to pledge collateral, but you may have to sign a personal guarantee. That means if your business doesn’t pay back the money, the bank or lender can come after your personal assets. Unsecured lines of credit tend to have lower limits and higher interest rates. Many unsecured credit lines have a credit limit from $10,000 to $100,000.
“A personal guarantee can be required if your business doesn’t have paperwork or you’re a sole proprietor,” said Michael Levin, a professor at Otterbein University. “They want proof you can pay the loan back.”
When should you choose a line of credit?
There are several reasons why a business owner would want to use a line of credit, including these four scenarios.
- Fund growth: Business owners in growth mode can benefit from a business line of credit. It can be used to purchase new equipment, launch a marketing campaign, or otherwise grow your enterprise. “If you are expanding your business or entering a new market a business line of credit makes sense,” said Levin.
- Fill cash-flow gaps: Many small businesses don’t get paid on the spot for their services. Sometimes it can take sixty to ninety days. That can negatively impact cash flow. A line of credit can be used to fill any gaps while you await payment.
- Peace of mind: Unexpected emergencies and expenses is part of running a business. If you aren’t prepared, it could spell your business’s demise. A line of credit is insurance against that, acting as a cushion when you need cash.
- Builds your business credit rating: If you maintain your line of credit, it will be reflected in your business credit score. The higher that is, the lower the cost of future borrowing.
How do I get a line of credit?
Business owners have options when applying for a line of credit. Banks and credit unions offer business lines of credit, as do credit card issuers and online lenders. It’s important to shop around since the interest rate will vary from one lender to the next. Levin said to start with your existing financial institution and take it from there. They already have a relationship with you and may offer deals if you have a business banking account.
Online lenders are another option. They tend to be more lenient than banks in approving borrowers, but the interest rate may be higher.
“A general rule of thumb: for banks, you have to be in business for three years and have $250,000 in annual revenue; for online players, it’s one year and $100,000,” said Rossman.
What is a business credit card?
A business credit card is also a revolving line of credit that can be used to make purchases. Credit cardholders pay annual interest and fees, otherwise known as the annual percentage rate (APR). Many business credit cards have rewards and loyalty programs that give you cash back and/or points on purchases.
How does a business credit card work?
Business credit cards act the same way that personal credit cards do. You use them for purchases online and in stores and are required to pay a monthly balance. If you don’t pay the entire amount, it carries over to the next pay period and interest is tacked on. Credit card debt can get expensive, particularly if the APR is high. Also, some credit card issuers charge an annual fee.
Business credit card issuers look at your personal and business credit scores when approving you for credit. If you have a high credit score, you’ll get a lower interest rate on your card than someone with a poor credit score. If you default on your credit card it will have a negative impact on your personal credit score and standing.
Business credit cards have a lot of perks if you use them responsibly. To get your business, credit card companies will lure you with generous rewards and bonuses. They know businesses tend to spend a lot of money each month and they will go to great lengths to win your business. Most offer 0% introductory APR, sign-up bonus, and generous cashback or point on purchases.
When should you choose a business credit card?
Business credit cards can be very useful for business owners, granted they are paying off the balance each month and avoid racking up credit card debt. Here’s a look at three of the big reasons why you may want to use a business credit card.
- Rewards you for purchases: A big perk of using a business credit card for purchases is the rewards. From cashback to free flights, business owners can rack up serious cash and rewards with a credit card.
- Prevents comingling of accounts: Having a business credit card helps you keep business and personal expenses separate. Whether you’re just starting out or have been in business for years, best practice is to have a separate business and personal checking account. This applies to credit cards too. Having a business credit card helps you keep your expenses separate and also makes it easier to track them.
- Builds your business credit score: Just like a line of credit a business credit card can help you establish or build your credit score. If you use the card responsibly, your rating with the credit rating bureaus will increase over time. That will make it easier and cheaper to borrow money the next time around. A lower monthly payment on future credit card debt is welcome news to business owners.
Line of credit vs credit card: which should you choose?
There are several differences between lines of credit and business credit cards. Which one makes sense for you depends on your credit standing, funding needs and business type. Consider the following four questions.
- Which can you qualify for? Business credit lines are harder to get than business credit cards, requiring you to have an established operation. According to Rossman, the interest rate on both products are in similar ranges, although you may pay more with a credit card depending on your credit score. If you and/or your business don’t have stellar credit, you have a better chance of getting approved for a business credit card than credit line. [Read related article: How to Apply for a Business Credit Card if You Have Bad Credit]
- How established is your business? If you are a sole proprietor or a new business owner who doesn’t yet have any financial documentation for your business, a credit card is the better choice. Typically, with a business line of credit, lenders require you to have one to three years in business and $100,000 to $250,000 in annual sales.
- How do you plan to use it? If you need money to make a large one-time purchase or for small expenses like office supplies, a business credit card makes more sense. If it’s for large recurring expenses like inventory purchases, emergencies or to fund growth, a credit line is a better option.
- Do you travel or make a lot of small purchases for your business? If you travel a lot for business or have a lot of small, regular purchases, a business credit card may be the better option because you can rack up a lot of miles and/or cashback rewards, granted you pay your balance each month.
“It depends on the type of business you have. If you do a lot of traveling as part of your business than a business credit card makes sense,” said Levin. “If you are trying to structurally increase your business, a business line of credit makes more sense.”
Facts Every Applicant Needs to Know – The Black Chronicle
Army veterans have some glorious choices in relation to their looking for a mortgage to purchase a house. Even when the veteran has a poor credit score document, there are nonetheless choices. For one, getting a VA dwelling mortgage with a bad credit score is thought to be essentially the most accessible choice.
That is definitely true, with the Division of Veteran Affairs (the VA) basically guaranteeing a share of the mortgage loan utilized for, enormously serving to to safe approval regardless of a bad credit score. However there are components that anybody contemplating making use of for these loans ought to concentrate on.
Traditionally, these VA dwelling loans solely took place on account of the 1944 GI Invoice, which was launched to assist conflict veterans settle again into civilian life. By the VA guaranteeing these mortgages, veterans had a greater likelihood of getting their very own dwelling. However there are nonetheless standards for candidates to fulfill.
The Worth of a VA Assure
The largest drawback for mortgage candidates is convincing lenders that they may get their a refund. Even when looking for a VA dwelling mortgage with a bad credit score, the lender must know that the borrower could be trusted to make the repayments that must be made. Since VA loans include a assure, that safety is supplied.
Unsurprisingly, the backing of the VA is a large increase to anybody seeking to safe approval regardless of a bad credit score. And for the debtors, a assure from the VA additionally removes the necessity for a big down cost, and usually signifies that the rate of interest charged is decrease.
However the VA shouldn’t be keen to ensure 100% of the sum being borrowed – actually, it solely covers 25% of the worth of the house. So, whereas the curiosity on a VA dwelling mortgage is decrease, and a down cost is often not wanted, there’s nonetheless 75% of the sum borrowed that’s not assured.
Qualifying For A VA Mortgage
Since a VA mortgage is reserved for navy veterans, qualifying for a VA dwelling mortgage with a bad credit score depends on assembly some strict standards. In fact, there are fundamental situations to satisfy too, like age and nationality, however the VA want affirmation of navy rank and deployment historical past earlier than they’re keen to ensure the mortgage.
There are monetary situations too. For instance, candidates can’t have defaulted on a mortgage with any lenders inside the earlier 12 months, and can’t have been declared bankrupt at any time inside the earlier 24 months. In spite of everything, lenders are solely keen to grant approval regardless of a bad credit score if they are often certain repayments shall be made.
One other situation to fulfill earlier than qualifying for a VA dwelling mortgage embody proving they’ve full gainful employment. As with every different mortgage, repayments need to be revamped many years, so monetary safety is essential.
Put together Your Software Correctly
Lastly, it’s tempting to consider that it’s straightforward to get a VA dwelling mortgage with a bad credit score, however the reality is that there isn’t a assure that approval shall be given. Many navy veterans are rejected as a result of their software was deemed unconvincing.
Keep in mind that the VA solely agrees to ensure a 25% share of the mortgage after the lender has authorised the appliance. The precise software is submitted to the lender, so securing approval regardless of a bad credit score relies on their evaluation.
There are methods to enhance a credit score rating, and so decrease rates of interest, like utilizing a consolidating mortgage to clear present loans in a single go. When an effort is made, a lender is extra comfy granting a VA dwelling mortgage.
A principal learned one student’s family is getting evicted. Now she’s working to find them a home
CAPE CORAL — A school principal is working this holiday season to find a home for some of her students.
Shelly Homan posted a plea to Facebook after she learned one of her students’ families was being evicted with nowhere to go. Homan is the Principal here at Heritage Charter Academy. She was helping families in need by telling them about the turkey giveaway sponsored by Cape Coral Police, when she met Vincent Ponzo’s grandchildren.
“When I asked them about the Thanksgiving dinner that the police department was giving away, I found out that they were also going to be homeless,” said Homan.
Ponzo has been looking for a new home for months, but he has bad credit, and doesn’t have enough saved for first and last month’s rent plus a security deposit.
“We’re just running out of time and options at this point, and we’re not bad people. We work hard. I’m the general manager at a restaurant, my wife works for Instacart. My daughter is trying to raise her three kids in our home,” said Ponzo.
So Homan posted an SOS on Facebook, looking for a landlord willing to rent to them. It got a lot of attention.
“Shelly called me, and I was like what did you do? And she was, oh I just put a post out, and next thing you know I’m getting all this feedback from it,” said Ponzo.
“My focus is that the kids are in a home for the holidays. So whatever, whatever I have to do to reach out. The worst people can say is no I can’t help,” said Homan.
But Homan said people have already reached out trying to help. Ponzo said he hopes he can find a home soon, but he also said his story is just one of many this holiday season.
“This takes a lot for me to stand in front of everybody and go this is what’s going on, but if I don’t do it, maybe some other guy wishes somebody did that’s about to get kicked out of his house because he’s going through the same thing or worse,” said Ponzo.
If you are interested in helping Ponzo and his family, you can call the Heritage Charter Academy at (239) 223-7530.
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