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QuickBooks Capital is here to help. We’ve outlined some common funding options to help you make the right decision for your business.
Qualifying for small business funding can be challenging, especially if you’re in the early stages of building your business. Until you’re able to grow your business and establish a solid business credit rating, you may need to rely on your personal credit for financing options. The goal should be to get the funds you need at the best rate and terms — without putting your personal credit on the line.
The most common financing options start with personal credit and extend to more traditional small business loans, which offer added value to your business because the interest from business loans is tax deductible. Be sure to talk to a qualified tax preparer for advice unique to your situation, but you may want to consider big picture costs when you calculate which funding sources make the most sense for you.
Personal Credit Cards – Personal credit cards are often one of the first choices for small business owners. Personal credit cards are used by many new entrepreneurs who lack business credit or substantial sales to qualify for more traditional loans. The advantages to using personal credit cards include flexibility, ease of qualifying, and the ability to leverage a 0% interest promotion that offers you a way to avoid paying interest altogether for defined periods of time.
The disadvantage of using a personal card for business is that it’s linked to your personal credit score and any late or non-payments will adversely affect your personal credit. There is also a potential negative effect on your revolving utilization if you have high balances from month to month. Additionally, if you carry high balances and are unable to pay in full each month, interest rates on these credit cards may be quite high.
Personal Loans – Personal loans are easier to obtain than business loans, but the lending limits are typically lower, and the interest rates are generally higher. Unlike the large amounts that can be offered on small business term loans, personal loans typically offer smaller borrowing amounts of up to $50,000.
The challenge with personal loans is that most traditional banks typically won’t lend to businesses without a strong operating history and excellent personal credit. Because approval for personal loans is based solely on your personal credit, this can also negatively affect your personal credit if your business runs into financial troubles.
Business Credit Cards – Business credit cards are a flexible financing option for business owners and easier to get than many other forms of financing. Using business credit cards to fund your business means you can purchase equipment, inventory, and office supplies as needed. Unlike a personal or business loan, you don’t have to take out a lump sum at once and pay interest. Instead, you can purchase goods and services as you go, and pay interest on the funds you use rather than on the entire amount.
Similar to personal credit cards, business credit cards are an option if you use them to manage cash flow and pay off the balance in full each month to avoid interest. Otherwise, the cost of financing may be quite high, and there are other financing options that may offer lower rates and better terms.
Business Term Loans – Term loans come in two flavors: short-term and long-term. Short-term business loans make sense for cash flow, working capital, inventory management, marketing, and some business expansion goals. They feature shorter terms (the amount of time required to repay the loan) and lower fees, but you are limited to the amount of money you can borrow, and the monthly payments may also be higher depending on the amount and length of the loan.
Business loans have the advantage of allowing you to make predictable monthly payments and to deduct the interest costs, unlike personal loans used for business purposes.
Business Line of Credit – A business line of credit is a flexible way to borrow, but interest rates are often high and there may be monthly and annual maintenance fees. Essentially, a business line of credit allows you to access funds up to your credit limit so you only pay interest on the money that you draw from the line of credit. To qualify for a business line of credit, you’ll need to have excellent credit and strong business revenues. Lines of credit can be both secured and unsecured.
Understanding your financing options as a business owner is critical to finding the funding that best fits your business needs. Regardless of the funding option you choose, it’s worth spending time to thoroughly investigate all the terms and conditions to make sure it’s right for you and your business. Do your research, speak with other entrepreneurs or small business owners, and only work with lenders and businesses you trust. You want to be sure that you make the right choice to help your business thrive.