Hey guys Sean Mory here for another session of LenCred Credit Geek Q&A. Joined by Dustin Weitzell, my top funding advisor for the year of 2015 and today we are talking about something that was not a question that was submitted by you. This question, was one that Dustin and I decided we want to try answer because we see a lot in our day today. What is the difference between a loan and a line of credit? Why does that matter to you as a small business owner? For me something I find all the time Dustin, I am a credit geek obviously, when I hear ya I need a loan for my business, $50,000 loan, you know by next week. The first thing that I always stop my clients and ask is, ” ok I am a credit nerd, you say loan that is what I think you mean specifically, so do you need a loan or do you need capital?”
Why do you think everyone is so interested in the difference? Do you think it is education or do you think it is that they just think they want a loan? I think you are prying for an answer from me of that a lot of time clients do not know what they do not know! They have this vision as a kid you grow up, when I go into the bank they will give me a loan and I will start my business. It does not just happen that easily so sometimes lines of credit are easier to get, the way that we do it, you probably wouldn’t get a loan for a startup business. A line of credit or lines of credit the way we approach it is a lot easier typically. I think it is just education and most of the time when you get that out of them, they really just say I need this money and I know I will be able to do XYZ with it!
That is why what we do becomes so important because you know, I am not a broker, neither are you. I hate that word honestly because, it nothing against brokers, it just I am not. I am a financial strategist. Our job is to know what our clients do not, then give them that education for free. Help them to make a confident and intelligent decision in regards to how to get their capital. You do not use a loan for operational financing. You do not have to. Lines of credit that are revolving, continuously available, where you only have a payment when you are using it. For me is going to make a lot more sense then getting a loan, where you get $100,000 and you only need $20,000 initially, you are going to make a payment on the entirety of it every single month. That payment is fixed, your interest rate fixed, and you have zero flexibility, not to mention once that loan is done guess what? The bank is going to make you pay that back before they give you more money. Then you are going to pay them all over again to get you another loan.
So it is a vicious cycle where if you are getting the wrong, products, financial vehicles it can kill your business or with the right financial vehicle it can send you to the next level when it come to the next come to the ability to advance and grow. So loans we get when we typically need them and lines of credit, we preach to people to get them before you need them. There are so many benefits to lines of credit. When I started my first business, the biggest issue I had was on the revolving side, no one explained these benefits. For lines of credit, lets say you go in that direction, where are you going to go and get 0% possibly for a year?
Are you going to be able to say, ok on these months I know we are slow for us, how can I make sure I have a smaller payment? On lines of credit you pay down some of your debit on during the busy times and have a more affordable payment during your off seasons. There is some flexibility. You can not get loan increased with good payment history. You can not typically lower interest rates with great payment history on a loan. With lines of credit we open all these doors. If someone would have told me all those things I would have been ok with a line of credit.
Basically when you are paying to the bank on that loan. That is great. You pay 50 grand off better then ever anticipated this year. But that money is gone. You pay that onto a line or lines of credit that are revolving that money becomes available over and over again. You have a great payment history at that point. You are using the money that bank has given to you and you are using it responsibly and you are making them some money. The cost of good credit is? Interest. You have to pay a little bit back to get more of what you want. The simplest way I can put for anyone you do not take a Jeep on the drag strip and you do not take a Ferrari off road. Learn your products, learn their usages, learn the benefits, and find someone you can trust that if you do not know the answers, you can pay to know those answers.
Ask somebody! Read about it. Find out the difference between a loan and a line of credit. Decide what makes the most sense for you. Do not think you have to go straight to SBA every time. SBA is one of multiple options available to small business owners! One more thing because it is important that if you go, say you need $100,000, to get you through those two years. Maybe you only qualify for $60,000 right now. Well it is revolving so do not be nervous because as you make your payments and it goes back into your pool of credit. Maybe by the time you have made your payments back and you start doing it. You may have gotten $250,000 out of that line of credit by the time those two years are up! You have 60 grand but you use it continuously and you make payments and you have good month you pay more chunks back. Do not be nervous and that is an awesome way to start your business.
I hope that was helpful, we are going to start doing more not just question from you guys but items we are seeing in our day to day. keep sending us your questions we will keep on trying to answer them. Thank you for joining us for another session of LenCred Credit Geeks Q&A.