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Business Loans Vs Business Lines of Credit

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jpanarra

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Hey guys, JP here…

I've been browsing through the forum for someone to go over this topic.. I haven't really seen anything so I guess I'll start it.


I know that there are a number of ways to leverage your business and business loans and lines of credits seem to be the biggest ones that people refer to.

I did a bit of research and made a very superficial blog post but then I realized that there's got to be some people on here that really understand this and could give some really solid insight compared to some articles I found on nerdwallet or some blog.

I'm looking into this because I'm starting to research into importing/exporting and selling on a e-commerce store. I have a few and I've been looking into ways how to finance things safely.

It seems like the favorable choice would be the line of credit because of how it works.

The business line of credit works very differently than a business loan which is when a bank or lender is giving you a large lump sum and with a fixed interest rate and its backed by either a guarantee or collateral. (such as inventory, property, or equipment ) Which should gives you the ability to reuse and paying the line of credit off as you can and have some form of liquidity to the assets you have on hand to reinvest in growth.

Everything has their pros and cons but when it comes to flexibility and trying to cover several costs at once especially when starting something new that you don't have insight in. It might be better off going with the business line of credit because you’re only going to end up paying the interest of the amount of money you borrow. The only con is that you usually have access to less capital and the consequences can be pretty severe if you’re late on a payment in contrast to a loan.

When you’re working on cashflow and need to grab inventory or whatever to cover the next month’s forecast it might be best to go get a business line of credit.

The expectations is pretty low for a business to actually gain a pretty large line of credit which can go up to around 100k.

What I'm seeing that they usually ask for...

  • A Business Checking Account
  • 2 Months of profitable activity in a verified accounting software OR 3 months of transactions in your bank statements
  • Not a requirement but a suggestion of a $50,000 in annual revenue


If you can meet the above requirements, It might be smart to grab a business line of credit to leverage the assets, make sure that you have a plan and a clear ROI in place before you start spending.

So... if there are people on here that are more well versed in this than I am, please elaborate or correct me!!

Thanks!
 

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Vigilante

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I prefer whenever possible to not owe anybody money
 
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jpanarra

jpanarra

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I prefer whenever possible to not owe anybody money
Right now, I'm in the same exact boat as you. I owe nobody money, but I'm reading about it and apparently its a way to leverage your already owned assets and expedite growth. I was just curious to hear other's perspective.
 

Scot

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Just being frank here.. No one will give you a Line of Credit without 2 years minimum in business.

Even getting a loan from a legitimate lender, even with SBA is incredibly difficult right now.

I wish I could give you a better answer here or help you be more creative with financing... but that's why I've started fundraising. Because institutions wont give me any money.
 

levijean

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I think the max for most unsecured LOCs is 20% of annual gross sales, so to get $100k credit you'll need revenue > $500,000.
 

Kak

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What exactly are you planning to use the credit for?

There are times where debt makes sense and there are times when it definitely doesn’t.

Rolling the dice on untested inventory using debt is a bad idea. Financing a large inventory purchase that is already wholly or partially spoken for by a wholesale deal is a good idea.

Smoothing out cash flows is a good idea.

Equipment for your business that costs a lot but will turn a direct profit is a good use.

Debt is generally for sure things. You owe it whether it works as you planned or not.

Also, I am NEVER a fan of financing anything business related with personal recourse. I’ll pay a higher interest rate if I have to.
 
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Royce2

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Debt is generally for sure things.
Great response @Kak, what about using credit cards for buying from China? I see it being really useful if the manufacturers don’t hold up their end of the deal and then having the Credit card company deal with it. Thoughts?
 

Kak

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Great response @Kak, what about using credit cards for buying from China? I see it being really useful if the manufacturers don’t hold up their end of the deal and then having the Credit card company deal with it. Thoughts?
Sure you can. I use credit cards for inventory all the time. I love the security it affords.

You're only financing the inventory if you carry the balance. I would only buy with intention to carry the balance if the product was a very sure thing. I would carry a balance sparingly and I wouldn't carry it long on a high interest card either.

This works best with a leaner, fast turn business. If the hole keeps getting deeper, stop what you're doing.
 
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ZF Lee

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What exactly are you planning to use the credit for?

There are times where debt makes sense and there are times when it definitely doesn’t.

Rolling the dice on untested inventory using debt is a bad idea. Financing a large inventory purchase that is already wholly or partially spoken for by a wholesale deal is a good idea.

Smoothing out cash flows is a good idea.

Equipment for your business that costs a lot but will turn a direct profit is a good use.

Debt is generally for sure things. You owe it whether it works as you planned or not.

Also, I am NEVER a fan of financing anything business related with personal recourse. I’ll pay a higher interest rate if I have to.
And this was what Ray Dalio was talking about in the first few pages with Credit vs Debt in his book Big Debt Crises...

A must read, its like 1000+ pages though. Need to actually devote some REAL TIME to it, unlike my earlier reads where I can skim through.
 
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jpanarra

jpanarra

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Sure you can. I use credit cards for inventory all the time. I love the security it affords.

You're only financing the inventory if you carry the balance. I would only buy with intention to carry the balance if the product was a very sure thing. I would carry a balance sparingly and I wouldn't carry it long on a high interest card either.

This works best with a leaner, fast turn business. If the hole keeps getting deeper, stop what you're doing.
By far the best response on here.. This makes 100% complete sense.. only get a loan/credit when you already have your ducks in a row and ready to fire to cover all needed costs.

Thanks! and Rep++
 

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