Business Loans, Lines of Credit or Credit Cards, Which One Is Best?

It’s no secret that many of today’s most successful companies use debt to grow their businesses.  Top companies such as Apple, Disney, General Electric, and ExxonMobil leverage debt for financial gain.  Even though these companies are gigantic and your business may be relatively small in comparison, you can still use debt to your advantage.  I speak to many different types of businesses about their lending needs on a daily basis.  There are many options and the opportunity in front of your business will help determine which loan may be best for your business.

Term Loans (Mortgages, Equipment, Working Capital, and Vehicles)
Term loans are exactly what the name would imply - a loan that is taken out for a fixed term, typically with a fixed payment for a specific period of time.  These types of loans are usually used to purchase some type of asset, for instance, a building, vehicle, or specialty piece of equipment.  I recently helped to finance a building for one of our business members who was looking for a new space for his business because he had run out of space in his leased location.  Working together with his realtor, they were able to find an adequate location with room for continued expansion, and the monthly loan payments were less than his current lease.   The business was also in need of new equipment for expansion.  The business owner was able to obtain two new pieces of equipment with two, small, four-year term loans. 

Lines of Credit
Lines of credit (LOC) help fund short-term financing needs of a business, for one year or less.  We recently provided financing to a local commercial construction firm who works on large projects.  They typically will have a large initial outlay for their materials to start their jobs and then will pay down their LOC as the job progresses.  This use of leverage allows them to get the jobs started and completed in an efficient manner without needing to wait on payments.  They understand what their desired rate of return is on a job and budget the interest into their expenses when bidding.  Lines of credit should not be used for the purchase of long-term assets, such as equipment or vehicles.  While the low repayment requirements become tempting to do this, the business ends up paying more interest on a long-term asset than if they had taken out a fixed-term loan.  Many financial institutions will require a period of time for the line of credit to be paid down to a zero balance each year, typically for 30 days to avoid this problem.

Business Credit Cards
Business credit and charge cards are best used for an even shorter time frame than a line of credit.  There are a number of reasons credit cards might be used; ranging from everyday purchases of supplies to using them as an expense reporting tool for your business.  One member uses their business credit card for their two sales people who are on the road every day.  They use the card to pay for gas and client entertainment.  Employees then turn in their receipts with client names instead of filling out long arduous expense reports.  First Commonwealth business credit cards also offer travel and emergency assistance services, and an auto rental collision damage waiver program.

 As you can see, First Commonwealth has many lending options available for your business.  When it comes to lending, it’s important to have a good relationship with us.  Help First Commonwealth understand how your business operates and we can help you find the right loan for your business.

by: Steven Mertz - First Commonwealth's Vice President  Business Services