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The Pros and Cons of a Business Line of Credit

Business Finance

A business line of credit is the best option for you if you are looking for a flexible loan. Its function is the same as that of a credit card. Your business can borrow money from the line of credit whenever needed without paying interest on the entire line. The line of credit can also be used to cover all your payroll expenses and supplier fees. 

There is a secured line of credit and an unsecured one as well. In the case of a secured line of credit, you have to give collateral to get your loan approved. These two types of lines of credit vary in interest rates, fees, and other requirements. However, both types require an annual renewal. You have to make sure that you have been in business for more than six months and have a good credit standing. 

Pros Of Business Line of Credit 

1. Evens Out the Cash Flows 

line of credit loan can help you even out your cash flows when your income is lower than your expenses. With the help of this credit line, you can pay your bills on time and avail the discount offered on timely payments. That will help you save a certain amount of money. Similarly, when your business is down during the busy season, you can use the money from this to increase your production, which will boost your income.

2. Only Pay for Your Needs 

If you opt for a regular loan, you will have to pay interest on the entire amount. This can be way above your business’s budget. However, in the case of a secured or unsecured line of credit, you have to pay interest only on the amount you have withdrawn. The balance of your line of credit will be the estimated total of all the expenses that you incur. 

3. Better Opportunities 

With a line of credit, you have the chance to take advantage of opportunities like better marketing and advertising. They also open the doors to launching new products or opening an office in a new location. They also give you the ease of enjoying these things whenever you feel it is the right time. 

4. Relationship With the Lender

line of credit requires a little bit of inquiry to know about your loan balance. This will lead you to contact the individual who helped you get the loan at the bank or other financial institution. If you build a good relationship with them, you can get a good referral when you want to take out another loan for any purpose. 

Cons Of Business Line of Credit 

1. An Expensive Affair

Even though you have to pay interest on the amount you borrow from your line of credit, it is still expensive. This is because they usually come with a high rate of interest. Sometimes the interest rate goes above 20%. Along with that, many credit lines come with hidden fees for initiation and processing. They also charge a significant amount for late repayments. 

2. Application Process Is Time Consuming 

Applying for a business line of credit is much more burdensome than applying for a secured loan or a credit card. The documents required are:

  • Your business bank statements
  • Your bank statements
  • Business tax returns
  • Other business documents

This is why it takes a lot of time to get your line of credit approved and sanctioned.  

3. Leading to Temptations 

As good as a line of credit is for future opportunities, it is equally harmful because not every opportunity is good. If you take up business risks without evaluating them properly, you might end up using all your profit for the high-interest payments. Proper discipline is needed when you are taking out such a loan. 

4. Low Limits 

line of credit has a limit that is higher than a credit card but lower than that of a proper instalment loan. If the line’s limit is not enough for your business needs, taking up the line can be an entire waste of funds for you. The line will just add to your debt, leading to a downfall in your credit score and an increase in your debt-to-income ratio. 

Is A Business Line of Credit Right for You? If you are looking for extra cash flow but do not have any specific purpose in mind, this is the right call for you. It will help you get through the seasonal ups and downs of businesses without any hassle. However, it is important to keep in mind that qualifying for a business line of credit is not as easy as it seems, especially for the unsecured ones. The lenders also tend to put a cap on the expenditure limit of your line of credit that you may not enjoy.