Boss Lady

The truth: short-term financing and credit can help your business

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If you are a small business owner, thank you! It is people like you with businesses like yours that give neighbourhood communities their distinct flavour and charm. But it is definitely not easy to run a small business – especially during a global pandemic of such magnitude that brought the entire world to a grinding, seemingly indefinite halt. But eventually, the worst might just be behind us. And this is exactly when short-term financing and credit can help your business.

Despite COVID-19 and its impact on your business, you might start to see an upturn soon enough as the world slowly but surely begins to open up once again – making it an excellent time to start afresh. It might be the right time to infuse cash into your system to revive it or induce growth in anticipation of increasing demand. Many businesses trust small business loans or business lines of credit – as known as small business credit – to fund this new beginning, and you could, too. Here’s everything you need to know about a small business credit to make an informed decision.

Loan vs credit – what’s the difference?

While they are often used interchangeably and might imply similar meanings, small business loan and small business credit are very different concepts. A loan is a fixed amount that a financial entity lends at a fixed rate of interest for a fixed period of time. This type of borrowing creates debt. Small business credit, on the other hand, is much like a credit card! It gives you access to a predefined amount that you may or may not use. How much you can borrow is assessed by your credit limit. Unlike loans, this method of borrowing doesn’t create debt. As long as you keep making at least the minimum payments, you have access to credit as and when you need it. Both bank loan and credit might require a high business credit score – a number that represents your business’s creditworthiness. However, if your credit score is much lower than acceptable at banks, you look into an alternative type of bank credit called a merchant cash advance, which doesn’t generate any debt.

Why choose one over the other?

If you are looking for long-term financing, small business loans might be the best option. However, they can be time-consuming and paperwork-intensive. For short-term, urgent requirements, business lines of credit work best – like your personal credit card does when you need to pay for an impulse buy. Small business credit provides unmatched flexibility without the hassle of continually having to reapply for newer loans; you only have to apply once for a line of credit – again, like a personal credit card.

How to get small business credit?

The first and the foremost step towards securing a small business credit is perhaps checking if your business is eligible for one. Much like you would check for eligibility when applying for a personal credit card, there are certain criteria your business must satisfy to obtain small business credit.

  • Check your business credit score

A business credit score is a lot similar to a personal credit score. It tells banks and other lending institutions whether your business will pay its dues back. A higher score represents a responsible borrowing history, repayment on time, and sound financial health. If your score is 700+, most banks would readily extend lines of credit. If it is lower, you might have to face some struggle or borrow from other sources that do not focus solely on business credit scores.

  • Get your documentation in order

Before you apply for small business credit, you should have your documentation in order. This includes registering your business as an entity. In addition, open a business bank account and get your federal Employer Identification Number, a business equivalent of a social security number. It also helps to make your business contact information publicly available.

  • Know what you want

Though there are several types of business credit, the most common ones – and perhaps the ones you would want to apply for – are short and long repayment credit lines. They give you 6-12 months repayment and 12+ months repayment terms, respectively. You should choose the short repayment term if you know you will be able to pay off your credit quickly – this will help you save some interest. For all other cases, long repayment terms are best suited. There are secured lines of credit wherein you might be asked to put up collateral or a security deposit for your small business credit. Collateral could be property, business items like inventory or equipment, etc. On the other hand, unsecured lines of credit might not require collateral as a security deposit but eventually might be more expensive due to the lender’s higher risk.

  • File your application at the bank

Every bank has its own application rules and regulations, but generally, the process remains the same. Find out what documents your preferred bank requires or if there are any forms to be filled. You should be able to apply online – especially since COVID-19 might affect bank staff and operating hours. Once your application is submitted, your part of the process is done. The bank will verify your details and extend a line of credit if everything is on track.

Be mindful about your small business credit

Having a line of credit in case of emergencies brings a sense of security to many small businesses. However, it is important to use it prudently. Spend some time to study the fees and interest rates that apply. It is also wise to learn about optimising how small business lines can be used effectively, leveraging their maximum potential without raking up additional fees or unwanted fines.

 

Using your line of credit irresponsibly can impact your business credit score. This, in turn, might affect your creditworthiness in the future. You’d be surprised to know how straightforward it is to mess up credit scores: missed payments, borrowing too much, or unfavourable public records like bankruptcy claims, etc. can significantly lower your score. As long as you are mindful of these aspects of small business credit, you should be okay!

About Business Woman Media

Our women don’t want to settle for anything but the best. They understand that success is a journey involving personal growth, savvy optimism and the tenacity to be the best. We believe in pragmatism, having fun, hard-work and sharing inspiration. LinkedIn

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