Like most financing options, business lines of credit have both benefits and drawbacks. Knowing both will help you understand if this is a good option for your business.
- It’s a flexible financing option. One of the biggest draws for many businesses is the flexibility a line of credit provides. You have access to a certain amount of money and can draw from it on an as-needed basis. Once you pay back the funds, you’re free to spend the money again.
- It can improve cash flow. Cash flow is a problem for many businesses, especially if you have a seasonal business or clients who take a long time to pay. A line of credit can give you the funding you need for ongoing business expenses, and then you can pay it back once you have the funds.
- You only pay interest on what you spend. With a line of credit, you only have to pay for the amount you spend. So, if you only end up spending a fraction of your line of credit, you’ll pay less interest overall.
- It’s a better option than a credit card (usually). A business line of credit operates in the same way as a credit card, but they aren’t the same. A business line of credit tends to have a higher credit limit, Plus, you can use a line of credit for things like payroll, which may not be an option with a credit card.
- It can help you build business credit. Your lender will report your payments to the three major credit bureaus, so a line of credit can help you build your business credit if you regularly pay on time. This can be helpful if you want to apply for a small business loan in the future
- It has higher rates and fees. A line of credit is less expensive than using a credit card, but it is more costly than taking out a small business loan. You could get stuck with withdrawal and maintenance fees and, depending on your credit, a high APR. You should work with your lender to negotiate these fees.
- It can be challenging to qualify for. Depending on where you apply, it can be challenging to qualify for a business line of credit. In particular, banks and credit unions tend to have a stringent qualification process and may require you to put down collateral. You should expect to provide comprehensive financial statements during the application process.
- It must be managed carefully. A business line of credit can be great for covering short-term cash flow needs. As you would any type of debt, though, you must manage it carefully. It’s easy to find yourself trapped in a cycle of debt that keeps building on itself if you don’t stay on top of your payments from the star