Whether you&'re in the early stages of starting your own company or have been in business for years, at some point you&'ll probably need to borrow money. For small business owners, obtaining short-term credit lines and loans can provide the financial solution to keep the business going. However, there are some unique features to short-term financing to consider before signing your name on the dotted line.
Short- and Long-Term Borrowing
The principal difference between short- and long-term financing is that short-term loans and credit require repayment fairly quickly, generally within one year of receiving the borrowed funds. Long-term borrowing allows repayment over a number of years. As a result, most small business owners use short-term financing only to cover small purchases, pay employees, and address immediate, but essential, business expenses. If your objective is to expand your business, long-term financing may be the better option.
Before Using Short-Term Credit
Once you decide that short-term financing is appropriate, you&'ll need to assess how much your business can repay. You should use short-term business credit only when you&'re fairly certain that operations will generate enough cash to repay your creditor on time. Consider the length of time you&'ve been in business, your earnings history, your current sources of income, and any new sources of income you plan to create in the near future.
Lenders Will Likely Check Your Personal Credit
When you apply for short-term financing, most lenders will evaluate your personal credit history as well as the business&' credit, since a personal guarantee from the business owner is usually necessary. This is always true for a sole proprietor and often true with limited liability companies and corporations. A poor personal credit score, despite a stellar credit history for the business, may result in higher interest rates or denial of your business loan application.
Restrictions on How You Can Use the Funds
Certain types of small business loans allow you to use the money only for certain types of business expenses. A U.S. Small Business Administration-funded short-term microloan, for example, permits a business owner to use loan funds only to purchase inventory, supplies, machinery, equipment and other ordinary expenses that are necessary to operate. You cannot use these loan funds to purchase real estate or pay preexisting business debts. If your business needs unrestricted access to funds, you may want to consider a business credit card or private bank loan instead.
A Business Lawyer Can Help
The law surrounding the use of short-term credit to finance your business is complicated. Plus, the facts of each case are unique. This article provides a brief, general introduction to the topic. For more detailed, specific information, please contact a business lawyer.