Credit options for your business

Different choices for different business needs

Having access to credit can be a life saver for businesses during periods of high expenses, slow revenues or operating emergencies. But do you know what type of credit you’ll need?

Revolving or installment loans, secured or unsecured credit – businesses may need any or all of these borrowing options, depending on their circumstances. Understand how each works to choose the best credit solution for your business needs.

Revolving credit

Revolving credit can be used at any time and for any purpose, up to a pre-set borrowing limit. While there’s a minimum payment required each month, payment amounts can vary and funds repaid are immediately available to be borrowed again.

Business credit cards and lines of credit are two of the most common forms of revolving credit.

Revolving credit offers tremendous flexibility and if a company is strong financially and there is security backing the account, higher borrowing limits and lower interest rates may be available. But managing revolving credit takes discipline, to avoid temptation to take on more debt and carry larger balances, simply because you can.

Installment credit

Installment credit, on the other hand, involves funds borrowed for a set period of time (the term) that are repaid through scheduled, periodic payments – most often monthly. Typically based on an amortization schedule, installment loans involve the gradual reduction of the principal amount owed until full repayment is made and the credit agreement ends.
With installment credit, the funds repaid are not available to be borrowed again unless a new credit application is submitted and approved.

The purpose of an installment loan is usually specified at the time of the application. Because the risk to the lender may be less (the loan can be secured, at least in part, by the asset being acquired), interest rates may be lower.

Common forms of installment credit include commercial mortgages and vehicle or equipment loans.

Secured vs. unsecured credit

Secured credit is backed or secured by tangible assets (property, equipment, inventory); unsecured credit is not.

Both revolving and installment credit can be secured or unsecured, depending on the financial strength of the company, the policies of the lender, and the reason for the loan. Unsecured credit is typically riskier for the lender, so it normally costs the borrower more. For example, if your operating line of credit is secured by your business property, it will carry a lower rate, than a line of credit provided simply on the strength of the business financial statements.

What credit to use, and when

Because of its flexibility, the fact that it can be put in place (even if not used), and that it’s available immediately, businesses rely on revolving credit. It’s normally used to provide working capital to help with business operations and cash flow management. Most businesses need help from time-to-time to smooth cash flow “bumps”; revolving credit can provide a fast and simple short-term solution.

Credit cards can be used for smaller monthly expenses, while a line of credit can help cover larger operating costs or unexpected situations while waiting for accounts receivable and other sales to be paid.

Installment credit is most often used to acquire big-ticket items such as real estate, vehicles, equipment, and other capital assets. Scheduled monthly payments make budgeting easier because you have the certainty of knowing how much your monthly payments will be and how long you’ll have to make payments. With an installment loan, the acquisition of more expensive items or better equipment can be made more affordable, leaving cash and revolving credit available for day-to-day operating requirements.

It’s important to remember that an installment loan usually involves an application and approval process, so factor that time in when making the decision to acquire an asset.

Get expert advice

Depending on your situation and the financial strength of your company, revolving and installment loans, secured and unsecured credit can all be used to help manage and grow your business. It’s important to consult with your business advisor when deciding on the best solution for your business.