Jack McColl is an entrepreneur, credit expert and mentor. He is the creator and visionary of the mentorship course Credit Stacking.
When it comes to money, many people follow the beaten path. The traditional methods of making money, budgeting and funding a business continue to reign unchallenged. Yet, just because they are common doesn’t inherently mean they’re your best option. Many people are scared to try the untraditional—to veer off the beaten path.
To all of my fellow business owners: When it came to starting your first business, how did you approach the funding portion? Did you take out a micro or SBA loan? Did you draft up a killer pitch deck and seek out investors?
These are some of the traditional ways to acquire capital for a business. Frankly, these are the only ways many people are taught. While you can get a sizable loan relatively quickly, it’s all dependent on your personal assets: credit score, annual income, employment history, etc. At the end of the day, if something were to go awry, it would impact you directly.
Allow me to introduce you to the benefits of the nontraditional approach: business credit. Let’s break down the pros and cons of each approach and how to make the best choice for your business.
Traditional Business Loans
The Advantages
While business credit cards indeed offer a range of unique advantages, it’s important to recognize the distinct benefits associated with traditional bank loans. Opting for a conventional bank loan affords entrepreneurs the potential for securing larger loan amounts and enjoying extended repayment timelines.
Moreover, bank loans come with structured and organized repayment schedules, which play a pivotal role in helping businesses effectively manage their financial obligations over an extended horizon.
Additionally, the acquisition of a bank loan can foster rapport with a financial institution, potentially unlocking future avenues for financing and bolstering credibility within the financial services industry as a whole.
The Disadvantages
Getting approved for a business loan at the bank can be a long-winded and draining process. Banks scrutinize your credit history, demand extensive financial documentation and assess your business’s profitability with a fine-toothed comb.
And even if your business has been succeeding for years, what happens when your business has a rough month and fails to meet its financial obligations? With bank loans, the consequences can be severe, especially if interest is involved. When you’re tied to inflexible repayment terms, these challenges become even more daunting.
Interest rates and fees are another drawback. Interest rates can vary depending on your creditworthiness, loan amount and loan terms. These rates can be steep, especially for loans considered high-risk. Banks also often slap various (arbitrary) fees that you often never see coming. These can quickly add up.
Finally, defaulting on a loan can seriously damage your credit score and even result in legal consequences. Banks have the right to impose late fees, increase interest rates and even pursue legal action to recover funds if necessary.
Business Credit
The Advantages
Business credit offers flexibility for funding your business ventures, even if you are seeking a high-risk business loan or a high-risk startup loan.
An advantage to business credit is that you can grow without interest in some cases. This allows you to grow your business with less pressure. For example, if you have an e-commerce business, you can use your spending limit credit card to stock your inventory so you can sell more and make a greater profit faster. Then, you can use the money you make from your sales to pay off your credit card debt.
Plus, in many cases, maxing out a business credit card won’t negatively impact your credit score.
Building business credit and having a business credit card offers numerous benefits, including accessible funding, flexible repayment terms and separation of personal and business finances.
The Disadvantages
When considering the use of business credit cards and credit lines to finance your next entrepreneurial venture, it’s important to acknowledge some of the potential drawbacks.
One of the most obvious concerns about the convenience of credit cards is that it can sometimes encourage frivolous spending, potentially leading to financial strain and difficulties in managing that incurred debt.
Additionally, relying heavily on business credit cards may impact the overall credit utilization ratio, potentially affecting the business’s credit score and limiting access to favorable terms for future financing. While this does not affect an individual’s personal credit history, it can make it difficult to acquire future business funding under an LLC or S-corp.
Making The Right Decision For Your Business
In the choice between business loans and credit-based financing, business leaders face a pivotal decision that demands a thorough evaluation of their company’s distinct needs, financial resources and fiscal strategies.
Key to this decision is assessing the funding amount required and its purpose. Larger endeavors might align with traditional bank loans for extended repayment periods and substantial capital infusion, while agile credit solutions like business credit cards can suit transient operational needs.
Evaluating the organization’s adeptness at managing debt is equally critical. While credit instruments offer immediate liquidity, structured loan repayments encourage good fiscal habits.
Ultimately, this decision requires aligning your business’s capital needs with the overarching strategy, financial prudence, and a firm commitment to maintaining a healthy credit standing.
The information provided here is not investment, tax, or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
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