Access to money is crucial if you own one of the estimated 33.2 million small companies in the US. Accessible funds enable you to handle operating expenses and seize growth chances. Business lines of credit are a practical option for meeting various demands for people experiencing short-term cash flow issues. However, there are advantages and disadvantages to using company lines of credit. To determine whether a company line of credit is appropriate for your needs, let’s examine its benefits and drawbacks.
quicker to acquire than loans
Your company can easily access the available funds anytime with an open line of credit. It takes much less time to do this than to ask for a loan each time a need arises. As a result, taking advantage of chances or dealing with the unexpected is simpler.
Reduced Interest
Business lines of credit operate more like credit cards than business loans, which require a lump sum payment and interest based on the whole amount due. Only the present principal amount is used to compute interest; the full value of the credit line is not taken into account. If businesses just use a portion of their authorized credit limits, it can lower the number of interest payments.
Better Cash Flow
Numerous small firms experience sporadic cash flow issues. For instance, seasonal enterprises may have significant booms during the busiest seasons of the year and financial difficulties during the off-season. Other small firms could occasionally encounter a decline in revenue or difficulties if a significant invoice from a client isn’t paid on time.
Small firms can acquire money to handle tough times with a company line of credit. As a result, they are able to pay their bills on time even if their income is temporarily inconsistent.
Relationship Development
Since lines of credit function similarly to credit cards, they present an opportunity to establish a long-term connection with a lender. Depending on the conditions of the arrangement, the account may continue to be open for as long as the corporation may profit from it. As a result, a company may be able to demonstrate to a lender that it behaves responsibly over time, which may facilitate future access to alternative loan products or obtain an increase in credit limit.
Cons
Increasing Interest Rates
Business credit lines typically have higher interest rates. While some may have APRs that are on the low end, about 8%, others might have APRs that are closer to 60%, if not greater. They can therefore be costly in the long run, especially if your business regularly carries a balance.
Greater Fees
Business lines of credit frequently have higher fees than substitutes like business loans. Fees for origination, processing, and maintenance may all be considered. Additionally, they can quickly pile up, making a business line of credit much more expensive than some anticipate.
Detailed Procedure
The application process for a business line of credit is tough, as it is with many funding options for small businesses. It entails evaluating the applicant’s and the company’s creditworthiness. Because of this, the documentation requirements are more stringent than they are for most consumer loans, and both partners’ creditworthiness is considered.
Low Maximum
Generally speaking, a business line of credit has a lesser limit than business loans do. Because of this, business lines of credit might not provide a company with the resources it truly needs to address high-cost financial difficulties.
