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Fiscal Fog

Don't know a loan from a line of credit? You're not alone--but we can help with a look at the most common financing myths.

This story appears in the January 2007 issue of Entrepreneur. Subscribe »

Entrepreneurs may have a keen intuition about their businesses, a clear understanding of the markets that move them, and a cool finger on the pulse of their industries. But when it comes to the capital they need to grow, many still have a lot to learn. According to a spring survey of small-business owners, part of the OPEN from American Express "2006 Semi-Annual Monitor," many entrepreneurs harbor a number of misconceptions about basic financing terms and the strategies that will put cash in their coffers. The following are a few of the more popular myths, debunked.

1. Financial credit options are all alike. More than a third of survey respond-ents believed a term loan and line of credit were pretty much the same--a mistake that could lead them to the wrong financial tool, and possibly to debt they can't afford. A term loan capitalizes a specific asset for a specific period of time. In general, you want to match the loan to the life of the asset you're buying, says Rebecca Macieira Kaufmann, executive vice president and head of the small-business segment of Wells Fargo in San Francisco. "If you knew you were remodeling a space that had a five-year life, then you'd want a five-year loan to match that depreciation," she says. A line of credit, on the other hand, is a revolving finance tool you can tap as needed. The lender sets a maximum amount of funds it will make available, and interest typically accrues only when you use the funds, says Jed Scala, vice president of small-business finance at OPEN from American Express in New York City. Its quick availability makes it ideal for short-term cash-flow needs.

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