Should I Apply for a Line of Credit or a Business Loan?

One of the most common questions we receive here at Mulligan Funding has to do with business lines of credit; and specifically, whether it’s advantageous or not to choose this option vs. a business loan.

Assets, Cash Flow & Credit Scores

Although we know that it’s bad form to “answer a question with a question”, our goal is always to help our clients save money, time and stress. And so when we get this question, the first thing we typically ask is: do you have a significant amount of assets, verifiable cash flow for several months, and a great credit score?

If the answer is anything less than a clear, unqualified “yes” to ALL parts of the question, then the answer is simple: go with a business loan (and specifically, a working capital loan or working capital line of credit – both of which are discussed below). This is because getting a line of credit without assets, cash flow and a great credit score is virtually impossible.

More on Credit Scores

However, even if a business owner answers “yes” to our follow-up question, they need to know something else about lines of credit – something that their bank or credit union typically won’t tell them.

This is that when they draw down their line of credit, they’ll also be lowering their credit score. That’s because, as far as the credit bureaus are concerned, their ratio of assets to debts will lean more towards the latter. Indeed, many people – both individuals and businesses – are stunned to discover that their credit score has taken a significant hit, and all they’ve done is avail themselves of their line of credit.

Choosing a Working Capital Loan

Once they discover the above, most business owners opt instead to apply for our working capital loan, which is a type of business loan that is far more “user-friendly” than either a line of credit or a conventional bank loan.

This is because our working capital loan is available to business owners that don’t necessarily have a large asset base, months or years of strong cash flow, or great credit. What’s more, there is no ongoing “credit score hit”, as transactions are not reported to credit bureaus.

Choosing a Working Capital Line of Credit

Alternatively, some business owners opt to apply for a working capital line of credit. This can be the ideal option for borrowers that want to have ready access to funds, but do not need cash immediately or imminently.

With a working capital loan of credit, business owners are pre-approved for a certain amount (e.g. $50,000), and can draw down the line of credit as required. Interest only accrues on the amount borrowed; not the amount available. Furthermore, as with working capital loans, transactions are not reported to credit bureaus. As such, there is no risk of damaging credit scores.

Learn More

Call Mulligan Funding at 855-326-3564 to discuss your financing options today!