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Credit Vs. Financing: Which is a Fit for Your End of Year Plans

AUTHOR: Kevin Jaskolka

The end of year can be an expensive time for small businesses. They put resources into holiday plans, hire seasonal workers, start working on major annual financial reports (depending on their fiscal year) and start budgeting for the coming year. There's a lot of extra work to go around, and many small business owners look for some extra help to get them through to the new year.

While this can be a difficult time of year, it's also a period that presents a wide range of opportunities for small business owners. You can run ambitious holiday promotions to take advantage of events like Small Business Saturday and gain consumer attention during the peak shopping season. You can revisit your business model and set lofty goals that drive excitement for the year ahead.

To act on that excitement, many businesses will seek some form of financial help so they can get ahead both through the end of the year and as the new year gets underway. If you're seeking similar financial help - looking for access to fiscal resources specifically to grow your business - then you'll ultimately need to decide if you should open up a business credit card or seek a small business loan. Each option presents its own pros and cons, so let's explore them in more detail:

Pros and Cons of Business Credit


What Is It?

Business credit cards create a line of credit you can tap into when you need money. In most cases, you'll receive a credit card to access the funds. You can only use the amount of funding made available in the line of credit, but once you've paid off the credit you've used, the space opens up again. If you have a $5,000 line of credit and spend $3,000, you'll have $2,000 left. After you've paid off that $3,000 (and any interest), you'd be back to having the full $5,000 available.

Pros

A business credit card can provide a variety of benefits, including:

Cost efficiency: With a line of credit, you only pay interest on what you actually spend. As such, there aren't any wasted costs that may come from a loan, where you may overestimate the funds you need and still need to pay back the entire loan.

Rewards: Business credit cards can provide cash back or reward points, giving you some returns that offset your spending.

Flexibility: A $5,000 line of credit can end up providing $25,000 of funding if you are quick to pay off the credit you use. This flexibility gives you the freedom to use the funds for diverse reasons over time as the money is available instantly.

Ease of use: Credit cards are simple and easy to use, letting you make purchases just about anywhere.

Cons

While lines of credits offer some great benefits, they do have some limitations, including:

Scale: Business credit cards usually only allow for fairly small amounts of credit, making them a poor fit for situations when you want to make a major equipment purchase, invest in staff or fill in cash flow gaps.

Total cost: Credit cards tend to come with relatively high interest rates when compared to loans, leading to higher relative costs, even if credit cards can provide cost efficiency.

Risk: Business credit cards can be difficult to monitor and protect, and employee fraud and other forms of theft are possible with lines of credit.

Pros and Cons of Small Business Loans


What Is It?

A loan is a lump sum of money that a business receives, with expectations that the funds will be paid back over a specified amount of time.

Pros

Some of the key benefits of small business loans include:

Larger sums of money: Banks can provide large loans for small businesses. Alternative lenders, which tend to focus on smaller loans, still provide funding in amounts between $5,000 and $250,000, with amounts varying between lenders.

Fits for specific purposes: While lines of credit give you some flexibility, loans are ideal when you have a distinct purpose in mind and need funds to pursue that goal. In those cases, you have some cost predictability and a clear sense of what how the investment will create value to support not only paying the loan back, but also drive business growth.

Cons

Availability: Once you have a line of credit, those funds are constantly available until you cancel the account. With loans, you have to go through an application process for the funds and reapply once you've used the money. With traditional banks, the application process can take weeks. The good news is that alternative lenders, like Select Funding, process loan applications in just a day, getting you funding quickly to create flexibility.

Risk: Taking out a loan is a major commitment, so much so that loans are traditionally secured by giving lenders the right to claim a business' assets if it can't pay the loan back. Alternative lenders are also changing this issue, as they often focus on loans that are small enough that they don't need to be secured by collateral.

Making Your Choice

Choosing between a line of credit and a loan is ultimately about fit. As you plan for the holidays and other end-of-year matters, you may find that both offer value. Lines of credit are often great for keeping up with everyday expenses that may put a strain on your bank account. Loans, on the other hand, are better for filling cash flow gaps, buying equipment or funding special projects. Either financing option can be a fit, especially as alternative lenders like Select Funding make frequent small loans an option for businesses that want to avoid credit cards while retaining flexibility.

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