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When starting a new enterprise, there are a wealth of different financing options that you are going to have to consider for your small business. Credit lines, credit cards, cash advances and loans of many forms and from many different sources overwhelm many entrepreneurs, leaving them unsure of which options are good for what purpose, so this article will hopefully demystify some of the credit options available to borrowers.
The most common option available is, of course, the standard business loan. Most start-up loans do not, contrary to the common-sense logic of many entrepreneurs, originate from big banks, rather they tend to come from small banks and credit unions (which are much more competitive, offer better interest rates, and are more friendly to start-ups) or SBA loans, which, although they are offered through conventional lending agencies, are actually guaranteed by the federal government. Often, these SBA loans exist in the form of micro-loans, which cover amounts of $35,000 or less. (Although these are typically amounts that are too small to get a good business off the ground, many people apply for multiple SBA loans within a short period of time to get the best loans available to their small businesses).
Credit lines are another common bank-issued option. Credit lines are very similar to credit cards: they are revolving credit accounts with comparable interest rates that are not amortized. The most common form of credit lines are, of course, personal lines which are usually secured by home equity, but business credit lines have two principle differences: they are more often than personal credit lines unsecured (that is, not secured by a direct asset), and they are usually much larger. Small business credit lines come with a check book, which is directly connected to the business account.
Credit cards are very popular, and work much the same way as personal credit cards. They are issued based on a credit score and are usually unsecured. Business credit cards are an excellent way to build initial credit, in addition to being a very convenient method of making purchases.
Finally, cash advances are a lesser-known method of credit building, issued by merchants, which offer loans based on potential credit card sales. In order to qualify, your business will need to show a certain number of credit card sales in order to apply; high amounts of credit card transactions will make you a likely candidate for a merchant cash advance.