Access to adequate capital – at the precise time you need it – is essential to keeping your insurance agency thriving and growing, but not all capital resources are created equal.
Small business loans and business credit cards are two common sources of capital for agency owners. Before we start comparing those options, let’s clear up a common misconception that a small business loan is always related to a Small Business Administration loan (“SBA loan”). A loan to a small business like your insurance agency provided by a lender such as First Mid Bank & Trust, doesn’t mean it’s an SBA loan.
The following sections broadly highlight how these business credit cards and small business loans differ:
Loan Amount
- Credit Cards: $5,000 to $50,000
- Small Business Loans: $50,000 and higher
Type of Loan
- Credit Cards: Revolving line of credit
- Small Business Loans: Installment loan or a revolving line of credit
Monthly Payments
- Credit Cards: Varies based on the balance you’re carrying; it’s easy to get into trouble by only paying the minimum amount due
- Small Business Loans: Same predictable amount each month if it’s a fixed rate loan
Interest Rate (non-binding estimates)
- Credit Cards: 17% to 27%, depending on credit-worthiness (short-term 0% options are available, but rates jump after the initial promotional rate expires)
- Small Business Loans: Average today of 7.75% to 9.75%
Application Ease and Approval Speed
- Credit Cards: Faster approval (0-7 days), and collateral isn’t required
- Small Business Loans: Approximately 30 days and more documentation is required. Some express programs can be faster with less documentation.
Sample Uses for Each
- Credit Cards: Immediate, unexpected purchases; lower cost items
- Small Business Loans: marketing and hiring; mid- to long-term needs
Credit History Requirements
- Credit Cards: Steady income needed + strong personal credit score
- Small Business Loans: Solid business plan with three years of revenue on an existing book + good credit
Risks
- Credit Cards: Less protection against fraud (by scammers and/or employees); potential impact to personal credit score even if paid responsibly
- Small Business Loans: Fewer risks, other than the slightly longer application and underwriting process
A Closer Look at Small Business Loans
While business credit cards can meet an unexpected cash flow need – such as a computer and desk for a new employee – small business loans are most often used for larger, long-term needs. Here are some specific ways insurance agency owners can use small business funding:
- Real estate purchases
- Acquisitions of other agencies
- Office remodel, upgrades, or expansion
- Infrastructure investments
- Business growth plans and marketing
- Staffing needs for agency growth
At First Mid, we enjoy working with each client to help choose the lending approach that works best for your agency’s needs. Please contact us today or get to know our consultative agency finance team. We’d like to help you compare your options.
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