Three types of small business credit

Your coaches introduce the three types of small business credit.

LuisIf your business has good cash flow, you may not need to borrow. But having business credit can be a very helpful tool to successfully manage your business.

MichaelThe process of borrowing for your business is similar to borrowing for yourself. However, the reasons can be different.

LuisThat’s right. When you get a personal loan, it’s usually to buy something you simply want to own — like a car or appliances. But if you’re a smart business owner, when you borrow money for your business it will be to improve or expand your business and its profitability.

MichaelOne example of this would be getting a loan to buy equipment that will increase your production capacity or lower your production costs over time.

LuisKeep in mind that it’s a good business practice to seek credit before you actually need it! This can help you to plan for the future and be prepared to take advantage of new opportunities as you find them.

MichaelGood point! Here’s a chart that explains the three primary types of small business credit.

Three types of small business credit

Secured Credit Unsecured Credit SBA Credit
“Secured” credit means that the lender knows you have the assets, or collateral, available to repay them. For example, to qualify for $1,000 of secured credit, you would need to provide the bank with proof that you have $1,000, either in cash or another acceptable form, such as equipment or investments. “Unsecured” credit has no collateral attached. This means your personal assets are not a factor in the loan deal. Loans or credit lines from the U.S. Small Business Administration (SBA). To qualify for most SBA credit, your business should have a good credit history and show the capacity to repay. For most SBA loan programs, you apply to a financial institution, but the SBA helps you, the business owner, by guaranteeing to repay the lender a certain percentage of the loan amount if you were unable to. Your business may be able to borrow a higher amount or receive a better interest rate than you would without an SBA guarantee.

Learn more about credit in the topic Using Credit to Your Advantage in the Hands on Banking for Adults course. For more information about the SBA, see the lesson How the SBA can help you.

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