If you have ever run out of money needed for a project or urgent need for cash, then a business loan or line of credit probably sounds like the best choice. However, if your concern is the long-term stability of your business, then a business loan or line of credit may not be the best solution, because it requires collateral (in the form of property). When considering business loan vs line of credit, it is usually easier to get a business loan or line of credit with a personal guarantee. This way, if the business does not make money or does not succeed, then the lender has already shoulder the financial risk. With a personal guarantee, there are no potential risks to the lender, therefore he can provide you with a business loan or line of credit at a more favorable interest rate.
A business loan vs line of credit usually come with high interest rates, but this can actually be a good thing for small business. Because you have high interest rates, you actually have low payments, and since you have low payments, you can budget your business expenditure better. In order to get a business loan or line of credit, you should convince the lender that the interest rate is acceptable for his business. In addition, your business plan should give him a good picture of what your company can do and how much it will cost to do the business.
When you apply for a business loan with a personal guarantee, you are proving that you actually have a business to back up the personal guarantee. The personal guarantee shows that you have put up a valuable asset as collateral for the business loan. This means that if the business fails, the personal guarantee provides the lender with the security. This gives him the opportunity to provide you with a competitive business loan without as many risks as those of larger companies.
However, this isn't the only reason to use a business loan with a personal guarantee. If you have poor credit, then a business loan with a personal guarantee may not be possible. Lenders look at your credit history before they make any loans, and even if they do approve you based on your personal credit, they might not ultimately approve you. Most business loans require personal guarantees because they rely upon borrowers' word that they can repay the debt. If you have poor credit, a personal guarantee isn't going to provide you with enough equity to start up and keep your business running.
Finally, when you compare business loan vs line of credit options, consider the time and money that will need to be spent in order to start up your business. Small business loans with a line of credit are easy to obtain, and you can use this money immediately as soon as your business begins making money. Business loans with a business line of credit are usually more expensive because you will have to pay the interest for the period of time until your business makes enough money to pay back the business loan. You may . . . . . . also have to pay additional fees and costs, such as application fees and finance charges.
When you compare business loan vs line of credit options, consider what your business needs. If you want to get the lowest interest rates, then go with a business loan with a personal guarantee. If you want to avoid paying interest costs, then go with a business loan with no personal guarantee. However, you should still carefully consider all of these factors so that you can find the option that is right for your business.