Whether you are just starting out in business, or want to expand your existing business, there will probably come a time when you’ll need some extra capital. At this point, you have a choice to make. Should you take out a small business loan, or use your personal or business credit card? Here’s what you should consider when deciding how to invest in small businesses.
Impact on Your Credit Score
If you apply for a small business loan, your score may take a small hit. Most lenders will do a ‘soft hit’ when you first apply, particularly if you are going to a lender you already know, such as the bank where you have your business accounts. The ‘soft’ credit check won’t impact your score, but a ‘hard hit’ may drop it up to five points or so.
When you apply, see if you can get an idea of when the lender will do the ‘hard hit.’ Most lenders will wait until they are ready to approve you, and they pull your full report just to be sure that everything that you’ve told them is true. So, if you’ve been truthful in your disclosures, you should only get one ‘hard hit’ during the process.
Once you pay off your loan on time, your credit rating will increase, often significantly.
If you use a credit card to finance your new or expanding business, your credit score could change dramatically. One of the factors used to determine your score is the amount of credit you have available to use. If you have a plastic card with a $20,000 limit that only has a $1,500 balance on it, you will reflect favorably on this. If you then go and charge $18,000 worth of business equipment and supplies on that card, your credit score could take a serious hit because you will now have very little available credit.
Another risk may result from late or missed payments. If you are late with a payment because the balance is now much higher, your credit score will be negatively impacted.
Ability to Qualify
If you already have a plastic card with enough available amount to meet your needs, you don’t have to worry about qualifying because the credit is already there. If you need a credit line increase to have enough credit for what you need, beware. The credit card company may decline your request for an increase, or give you less than you need.
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Qualifying for a business loan is not a slam-dunk, but if your business finance level is good and you have a solid business plan, you should be okay. Different lenders have different criteria, so applying to a financing company that works with multiple lenders will help you improve your chances of getting approved. In general, you need to have been in business at least six months, and have monthly income of $5,000 or more. The larger the loan, the more monthly income you’ll need to show. If you have collateral equal to the amount of the loan, that’s even better. Having a basic understanding of small business finance will help, but most lenders will tell you exactly what you’ll need to qualify.
This is where the rubber meets the road in terms of choosing the type of financing you want to use. A plastic money can have an interest rate as low as 0% or as high as nearly 30%. Make sure you understand what the interest rate is on the card you plan to use. Some cards that advertise a 0% rate raise it after a year, so if you don’t pay off your purchases in twelve months, you could find yourself paying 18 to 20% or more. Many cards charge a higher rate for cash advances than they do for purchases, so if your financing needs include cash, make sure you know what your rate will be. Typically, there is a fee for cash advances as well, so factor that in when you’re comparing your options.
Many business loans are guaranteed by the Small Business Administration. The most popular SBA program, known as 7(a), offers loans with interest rates ranging from 6 to 8%, depending on the size of the loan. (Smaller loans pay a higher rate.) These loans are typically repaid in less than seven years. Lenders can make these loans to small businesses since they are guaranteed by the SBA.
It may seem like a good idea to finance your new or existing small business using a credit card, but a small business loan makes more sense in nearly every case. You will probably pay less for the loan overall, and the impact to your credit score will be better. Having qualified for and paid back a small business investment will also make it easier to get financing at an attractive rate the next time around.
Easy business loans with competitive terms are available from GoKapital. Call 1-866-257-2973 or contact us by chat today, and we’ll help you determine the best small business investment for you.