Your business could use some additional funds that don't seem likely to materialize for awhile—and as the saying goes, it takes money to make money. If you're in that situation and mindset, then you're probably asking yourself the question: Does my company need a business loan, or a business line of credit?

By asking yourself a few more questions, you may be able to answer that question.

1. Can my company pay off a loan relatively quickly?

If so, that's a sign that a business line of credit may be a good idea.

Generally, “business lines of credit are best for short-term debts or cash-flow gaps, which can be repaid or closed quickly," says Brian Cairns, CEO of ProStrategix Consulting, a management consulting firm in New York City that specializes in developing business plans.

Cairns says that if you need money for inventory, and you expect to be paid within 30 to 90 days, then a business line of credit is likely what you want.

Also, a line of credit is probably a better choice if you need money to cover your account receivables, where clients aren't paying you for 60 to 90 days.

—Brian Cairns, CEO, ProStrategix Consulting

Quiana Corde is the owner of Barazzo, a brand of multifunctional bags for “on-the-go" professionals based in Atlanta. She says that she has found a business line of credit helpful for making larger purchases and buying supplies she needs for day-to-day operations.

"It's a great option because it's revolving credit, and you can continue to use it as needed. The best advice is to pay as you go to avoid running up your credit line," she says.

2. Will it take me awhile to pay off the business loan?

If your company won't be able to pay off the business loan in full quickly, you should probably take out a business loan instead of a business line of credit.

“Loans are best when recouping the investment takes a significant amount of time—or when purchasing a long-term asset, which is usually depreciated over time," Cairns says. (He cites buying equipment for your business as a reason to possibly take out a business loan.)

Startup investments, he says, is another case in which a business loan may be the better option, since you know there's going to be some serious time before your client or customer base is built.

“I personally used a loan to start my business," Cairns says. “It was appropriate as it took time to build up the client base, and I needed lump sum cash to cover negative monthly cash flows from payroll, while our client base was built.

"I typically use a 90-day rule of thumb," he adds. "If it will take more than 90 days to start to recoup the investment, then a loan should be considered. If it is shorter, then a line of credit is usually more appropriate."

Just remember that you need some money coming in. You're likely going to have to make that first monthly payment within 30 or 60 days.

3. Do I understand the ins and out of a business loan and business line of credit?

If you're a C-executive, especially a CFO, you're probably rolling your eyes at that question. Of course you know the ins and outs; it's your job.

But business owners who don't exactly think of themselves as a banker or an accountant? You may want to brush up on the finer points of a business loan or business line of credit.

Some of the nuances you'll want to be aware of include…

• Interest with a business loan. It's generally higher than the interest rate for a business line of credit. But if you miss a payment with a business line of credit, the interest rate can go up, considerably. That's something a business owner who is under capitalized would want to be aware of ahead of time.
• Annual fees. Some business lines of credit have annual fees, especially if they're under a certain amount. For instance, if you take out a $50,000 line of credit, you may pay a bank $150 a year. If you take out a $100,000 line of credit, there may be no fee.
• Qualifications. Whatever financial institution you work with, it'll probably require your business to have been up and running for a little while (maybe six months or perhaps two years). You'll also probably need a certain threshold of annual revenue, like $250,000. But, of course, every lender is different.

4. Will taking out a business loan or business line of credit help my company?

It sounds like an obvious question with an obvious answer: You probably aren't gong to apply for either if you thought it would hurt your company.

But it really is something you need to drill down on. If you hate the thought of carrying any debt, maybe taking out a loan or line of credit will just stress you out. Or if business has been bad, now may not be the time to take on debt. (Especially if your cash flow hasn't been up and down, it's just been down.)

That said, if you know a business loan or business line of credit will be the jet fuel your business needs to reach a new level of stability and success, then you may just have your answer.

And it may be that instead of worrying about debt, carrying a little debt will make you fret far less. That's what happened when Julianna Dahbura was given two business lines of credit.

Dahbura says her lines of credit have helped her nail polish brand Deco Miami Cosmetics immensely.

“The amount isn't anything to brag about, but it's putting a lot less stress on my personal finances," Dahbura says.

Though she hasn't paid herself a salary since starting her business in 2015, she has paid her business. But those days of giving personal funds to her business, however, are now over, thanks to her business line of credit. 

In her case, it was a better decision than taking on a conventional business loan.

“Now I can live a little, because I'm not as worried about needing to use the cash I do have to finance future orders," Dahbura says. “I was my own bank before, but now I have an actual bank."

Read more articles on financing.

Photo: Getty Images

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