If you are looking for financing for your small business, you have several options to consider. One of these options includes a business line of credit. In order to understand if a line of credit is beneficial for your business, you need to consider the pros and cons of this type of financing.
Business Lines of Credit
A business line of credit is similar to a home equity line of credit. Your business will receive access to a specific amount of financing, such as $50,000. You only have to make payments or accrue interest on this financing if you utilize it for your business.
Most lines of credit are revolving, so if you use the financing and pay it back you have access to the same amount of financing again.
Business lines of credit can be secured or unsecured. If you secure a line of credit, you may need to use your receivables as collateral.
Uses for a Line of Credit
A line of credit is best used as a short term loan. It is often used to help cover operating expenses. Businesses often use a line of credit to:
- Help meet payroll obligations
- Cover seasonal expenses
- Handle temporary cash flow shortages
Any type of expense you need to meet before you cash flow improves can be covered using a business line of credit. You don’t want to use it if you are suffering from a long term cash flow shortage or for a long term investment.
Line of Credit Pros
There are many benefits to obtaining a line of credit for your small business. The fact that you have ready access to extra finances can help you if your customers don’t pay their invoices on time or if you have an unexpected expense. Other line of credit pros includes:
- Lower interest rate
- Lower closing costs
- Doesn’t require you to give up a percentage of the business
- Often don’t require collateral
- Helps to build business credit
These business line of credit benefits are one of the reasons why many small businesses turn to them for their funding needs. However, there are some disadvantages to this type of financing that you need to consider.
Line of Credit Cons
While the ability to keep your personal savings and not have to search for investors is nice, a business line of credit is only for short term financing needs. If you are looking to expand your business, purchase equipment or buy a new building, this type of financing isn’t an option for you. Other disadvantages of a line of credit include:
- If you miss a payment your interest rate can increase
- If you exceed your credit limit your interest rate will increase
- You need to pay up front fees to obtain the financing
- Line of credit needs to be repaid even if business fails
Another factor to consider is that the business line of credit still needs to be paid back. This added expense may become a burden to your company when your cash flow improves. Some companies end up in a vicious cycle of continuously borrowing and repaying from their line of credit.
As with all types of financing, you need to look at many different aspects to determine if a line of credit is beneficial for your small business. Contact one of our loan specialists to learn more so that you can make an informed decision.