How to Finance a Business: Credit and Loans

Welcome to the How to Finance a Business series! This series explores different ways to get the financing your for business, regardless if you’re financing your own start-up or buying a business already on the market. For many people, money is the only thing standing between them and their goal. You’ve got the business plan to make it work and the drive to see it to the end: all you need is someone who shares your entrepreneurial spirit.

Part One: Credit and Loans

This series starts with the two most straightforward financing options: credit cards and bank loans. These are no nonsense options, requiring a bank, some paperwork, a credit check, and a few days for processing. You may even have most of the groundwork covered (or already own a credit card). Most small businesses start up with one of these two options, so it makes sense to look at these first, provided you understand both the risks and benefits of these two options.

Credit Cards in Business Financing

Do you have a credit card? Most people do. America’s culture is all about using this plastic to get things beyond our immediate means, so why should a business be any different? According to a survey by the National Small Business Association, almost half of all small business were financed by credit cards. While this number and thought process might seem insane: think about it. If your company needs modest capital that it can quickly repaid, credit cards might be right for you.

Personal Credit Cards

“Just put it on my card,” is a phrase we’ve all heard or even said. Personal credit cards have the advantage of being easy to get and depending on your credit score, can provide a fair amount of liquid capital. If you already have a card, then you don’t need to do any of the paperwork or face-to-face time associated with bank loans and other financing options: you’re ready to go. Downside? If you redline the card and can’t repay fast enough, the high interest can quickly drag you and your business down.

Business Credit Cards

The personal credit is attractive because they are easy to get and use. A step between the personal credit card and a bank loan is the business credit card. While it takes longer to obtain and requires more work and convincing on your part, a business credit card is attractive due to a larger limit (measured in the tens of thousands as opposed to just thousands) and a lower interest rate, though it’s higher than most bank loans.

Bank Loans

There are many, many types of bank loans, too many to list here. Loans taken out against personal assets (such as a home equity loan) will be covered in another article in this series. Two major sources of bank loans are personal or business loan, and the line of credit. Both personal and business loans exchange an agreement with the bank in exchange for a lump sum of money. A line of credit is a cross between a load and a credit card. It allows you to take out a series of “micro-loans” as you need to, which is useful for unexpected expenses or a slowly ramping-up business model.

Getting these loans are trickier than credit cards: you have to be in good standing with your bank, have a good credit score, and generally convince the bank that you and your business are a worthy investment. In return you get a much better deal than with credit cards: most have a fixed interest that’s much lower than a credit card for a much larger sum.

At George & Company we’ve seen and made a lot of businesses happen, including help getting people the financing they need to succeed. If you’re interested in buying or selling a business, or getting the assistance you need to make that happen, please contact us and we’ll put our skills in M&A, brokerage, and appraising to work for you.