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You’ve taken the first step of starting a small business. Now you’re ready for the second step: expansion and growth. But how can you cover the costs of hiring staff, extending office space and increasing inventory while managing operating expenses at the same time? According to the Small Business Association (SBA), more than two-thirds of small businesses find the answer in one of the lending options below. Take a look at the pros and cons of each to find the one that fits your unique business and financial situation.
A business credit card can be a flexible source of small-business funding and is a good option for business owners who need to build their business credit score. Because of interest rates and credit limits, they are best used for short-term financing needs like inventory or office supplies.
Business lines of credit
A business line of credit is similar to a business credit card in that it offers a revolving source of credit, but it typically has a higher limit and requires proof of revenue to secure a loan. There's no set repayment schedule or term, so a business can tap its line for short-term objectives—like purchasing inventory or managing seasonal sales fluctuations—and repay the line when funds are available. If a larger amount of money is needed for longer-term investments like buying real estate or introducing new products, a small business loan is a better choice.
Personal loans can be used for business purposes, from starting a company to expanding a new product line. Some personal loans may offer a lower interest rate than a small business loan. The downside is that, since you are personally responsible for repayment, you must personally pay it back if your business doesn’t succeed. This could impact your personal credit score.
Small business loans
Small business term loans are exclusively used for long-term business expenses, ranging from working capital to the purchase of new equipment or real estate. Small business loans often have higher loan limits than personal loans, which means you may be able to get more funds for big expenditures. Term loans also typically offer single-digit, fixed interest rates that help business owners budget their monthly expenses. On the downside, you may not be able to obtain this kind of funding unless your business has assets and has established credit.
The SBA offers loans to new or underserved small businesses through financial institutions. The SBA guarantees up to 85% of a loan, which reduces risk for lenders. They can then provide SBA financing to business owners who might not qualify for other types of credit. Ranging from large amounts to microloans, which can be used for startup expenses like operating funds and inventory, SBA-backed loans offered by a Preferred Lender like TD Bank can typically be closed in a shorter timeframe.
Small business owners who are interested in learning more about their credit options and how to build business credit should consider the education, coaching and other support offered nationwide through a unique collaboration between TD Bank and the National Foundation for Credit Counseling.
Because SBA loans have strict qualifying requirements, it's important to work with the right lender. As the #1 provider of SBA-backed loans in DC and eight states, TD Bank is uniquely qualified to help you take your next step. Visit tdbank.com to learn more.*
*All loans subject to credit approval. Terms and conditions may apply.