Comparing Your Options: SBA Loans, LOC, and Credit Cards

Once you’ve established a successful small business, what’s the next thing on your mind? For most business owners, it’s sustainable growth and expansion. But this is a tricky time for most owners, as investment funds are often limited.

Thankfully, there are more financing options than ever to choose from. Which one is right for your business depends on a range of factors. Before you can make an informed choice, you need to have a basic understanding of what each type of financing entails. We’ll walk you through three of the most popular options: SBA Loans, lines of credit, and business credit cards.

Small Business Administration Loans

A Small Business Administration loan (SBA) is the most popular financing option for small businesses. Specifically designed to foster growth and expansion, SBA loans are guaranteed by the government. Typically, lenders get the cash they need on relatively flexible terms, and low-interest rates. Business owners tend to use the funds for working capital, expansion and equipment purchases.

While specialized lenders have started to offer SBA loans in recent years, the vast majority of approvals are still granted by traditional banks and credit unions. And as a result, the qualifying criteria for approval are relatively stringent.

This all sounds great, right? Well, not always.

Even an established small business with several years of healthy revenue under its belt can often struggle to get approved. There’s a lot of paperwork to file during the application process, which isn’t ideal if you need funds quickly. And you’ll need a pretty strong credit score to get the funds you need through the SBA, since they’re backed by the government.

The SBA backs up to 75 percent of the loan, but the bank is still accountable for 25 percent. As a result, you’ll probably need to provide some form of collateral. While there are lenders that will consider lending without tangible collateral, they often place a hold on general business assets—which they can sell off if you fail to keep up with your repayments.

Lines of Credit

A line of credit (LOC) offers a greater degree of flexibility than an SBA loan. A LOC is an arrangement between a business and a lender that establishes from the outset a maximum loan amount. However, unlike traditional bank loans, the borrower can choose how much of the maximum amount to draw, and when to draw it.

Imagine you have a line of credit for $100,000. Instead of receiving the entire amount at once, you can withdraw it in increments, on a schedule that suits your business. This means you only need to pay interest on the funds you’ve actually received, and not the entire $100,000. And depending on how business is, you can decide to make the minimum monthly repayments, pay a little extra every month or repay the entire loan back.

A LOC gives you the freedom to change your financing arrangements to suit the ever-changing needs of your growing business. For example, you might decide to take $50,000 in January, and repay $25,000 in June. Then in September, growth opportunities might mean you increase your loan to $75,000… before repaying $50,000 in April of the following year.

Of course, this is just an example of how a LOC can help you to control the interest you pay. But it demonstrates the in-built flexibility a line of credit has. After all, why pay interest on financing you don’t need until later in the year?

But just like SBA loans, securing a LOC isn’t always straightforward—even for established small businesses. There are secured and unsecured LOCs on the market today, but both entail a relatively large amount of paperwork. You’ll need high personal and business credit scores, and even then, the application process can take several weeks with traditional banks.

Thankfully, fintech LOC providers such as Fundbox make the application process quick and simple. There’s no minimum credit score involved, and no complex paperwork needs to be passed back and forth. Instead, you can complete the application process online, and in just a few minutes.

In many cases, all you need to do to apply for a LOC is to provide access to your bank details. Depending on which financer you work with, you can even get an answer in minutes, and you could get access to your funds the next day.

Business Credit Cards

While credit cards can be very effective short-term financing options, they shouldn’t be used for large capital purchases or investment. The interest rates charged on many credit cards are exceptionally high. And if you don’t repay the outstanding amount in full at the end of the month, the interest you pay is simply added to your debt.

Too many companies become embroiled in a spiral of debt. The interest continues to roll over from month to month, and the principal loan grows bigger and bigger. In a situation like this, some business owners are forced to use funds to pay off interest, instead of putting them towards expansion and growth. All the while, the total debt expands out of control.

Credit cards with competitive rates of interest definitely have an important role to play in business. They are always handy to have for relatively small, one-off purchases—as they help with day-to-day cash flow management. But used for long-term financing, they can be expensive, difficult to manage and limited in scale.

Small businesses need to manage cash flow carefully—which is difficult when there are so many variables involved. This is why a line of credit is often the best option, as it provides the flexibility you need to adapt to changing market conditions. If you’re having trouble securing a line of credit with a traditional lender, give a fintech provider such as Fundbox a try.

Byline: Irene Malatesta, Content strategist at Fundbox

Short bio: Irene is a business content strategist with Fundbox, passionate about working with entrepreneurs and mission-driven businesses to bring their stories to life. Fundbox is dedicated to helping small businesses grow by democratizing access to credit.