Business loans or business credit – what’s better for small businesses
If you need funds for your business, both business credit and a business loan can be a good solution for your company, but it is very important to understand that these are two different types of financial products.
Every company needs a stable cash flow to survive. Small businesses need access to working capital in periods where there are more payments than income. By taking a short-term loan, a company can still pay salaries and bills and at the same time keep the business running.
Small companies often also choose to borrow money to invest. Think of new equipment, new facilities, development of new products or inventory management. These elements sometimes require a small business loan. If you are considering buying a long-term loan or business credit for your company, there are some points that are important to consider:
Business loan with fixed term
These loans are usually used for large purchases or capital-intensive investments such as new installations, expansions, purchases or other large costs that small companies need to develop themselves.
- Fixed term : Normally you borrow a certain amount and you accept that you will pay back the same amount plus interest within a certain, fixed period. You borrow € 10,000 and pay this plus interest within 6 months. Loans with longer maturities often have fixed prices, so you know in advance how much the loan will cost and how much you have to pay monthly during the term.
- With or without a pledge : When a lender decides to lend money, he or she will take into account that the loan can not be repaid. To limit that risk, most lenders require that you provide collateral for the loan. This helps to reduce the risks. Keep in mind that you risk losing the collateral if the loan is not repaid.
Company credit without fixed term
A credit can be another possible solution. Credit is usually provided for a short-term period. This is similar to a credit card. There are a few important differences with a business loan.
- Flexible borrowing: If, for example, your company is approved for a loan of € 20,000, you can borrow € 20,000 immediately, but you can also borrow smaller amounts at different times – as long as the total debt remains below the set limit.
- No fixed term : Credit is similar to a credit card because it does not require you to make a fixed monthly payment to your lender. You can choose to make smaller payments for certain months, or at a certain point to repay the total debt balance. This can be completely dependent on the state of your company.
- Variable costs : With credit you have to deal with price fluctuations, because the price depends on the financial market situation. If interest rates rise, it may cost more money to repay outstanding credit.
In general, a traditional business loan is more useful for one-off purchases, such as new office equipment, new facilities or capital-intensive investments. Corporate credit is more of a credit card – designed for daily expenses and to keep the cash flow smoother. Would you like to know more about various lenders in the Netherlands?