Any small business owner will tell you that having enough cash flow is the most important thing for a business’ growth. Many small companies utilize business lines of credit to improve cash flow. However, although a line of credit offers access to cash as needed, it’s essential to be aware of the pros and cons before applying for a credit card.
To determine whether a business line of credit is right for you, we’ve broken down the pros and cons here:
What is a Business Line of Credit?
Even if you have a personal line of credit or have already received a “home equity line of credit” (HELOC), acquiring a business line of credit can be different.
A business line of credit is similar to a credit card in that you can use it whenever needed, as long as you don’t exceed the limit provided to you by the bank. With a business line of credit, you receive a maximum you can borrow against that you can use for any business-related expenses.
A business line of credit usually carries a higher limit than a personal credit card to cover bigger expenses, like expensive equipment, large inventories, and more.
Business Lines of Credit: Know Your Options
The difference between revolving and non-revolving lines of credit is that you can spend up to the limit with revolving credit. If you don’t use the credit, it still won’t expire, making revolving credit lines a good long-term financing option.
Non-revolving credit is a lump-sum financing option with a fixed draw period. The line of credit is closed when you pay off your credit line, and you’ll need to reapply for future funding later.
In addition, there are “secured” and “unsecured” business lines of credit. A secured line of credit is granted when you submit collateral to the bank, while an unsecured credit line doesn’t require any leverage from you. Smaller, newer businesses usually have difficulty submitting collateral due to limited assets.
Check our NerdWallet’s Top Business Credit Cards for May 2022 here.
The Pros of a Business Line of Credit:
Improves Cash Flow During Slow Seasons
If your business makes most of its sales during the holiday season and is slower throughout the year, having access to working capital via a business line of credit can work like a bail-out when funds are tight. You can use this credit to cover payroll during slow seasons.
Allows You to Pay for What You Use
Unlike a large, lump-sum loan, you only pay for the money you use. Your bank may even allow you to pay back in one lump payment to avoid monthly interest rates, but that is not so common.
Improves Business Adaptability
Having access to available cash at any time allows for businesses to take advantage of unique opportunities, like inventory discounts, quickly, or can be used to keep your business afloat in cases where unexpected expenses occur.
Builds Business Credit
Having a line of credit, even a small one, helps you build credit over time so you can access more down the line. Just like personal credit, the better your credit is, the better the rates you receive. The same goes for business credit. Obtaining a business line of credit and making payments on time can be a great way to build your business credit.
The Cons of a Business Line of Credit:
As with any source of funding, a business line of credit has its risks. In order to get the most of your line of credit, knowing those risks are important.
Consider ALL Fees
As with personal credit cards, the fees can add up quickly. Every lender has its own payment plans, but it is important to be aware of all fees associated with your line of credit, and not get stuck on a tantalizing “low-interest rate”. Factor in annual fees, late-pay fees, and other costs before deciding on which lender is best for you.
They’re Hard to Qualify For
There is a lot of paperwork needed to apply for a business line of credit. To start, you’ll need to provide the following information:
- Financial Statements
- Business and personal tax returns
- Bank account information
- Checking account information
- Business planning documents
Commonly, your business needs to have been open for two years in order to qualify. If your business is relatively new, other options may be better suited for your company, such as a small business loan, or a cash advance.
Potential for Misuse
While a business line of credit is perfect for providing emergency cash flow when needed, having it handy can be tempting for some. Overusing a credit card can lead to disaster if you spend more than you can repay in time.
Aside from the large fees involved in repaying, late payments also affect your business credit and the potential for other financing down the line.
Low Borrowing Limits
First time credit cards usually come with low limits. If you need funding for expensive equipment, a large inventory purchase, or to close on a location, a term loan may be most suitable for your business.
Like any time you are considering taking on a loan, weighing the pros and cons allows you to make an informed decision. Applying for a business line of credit can help facilitate cash flow as needed but should not be thoughtless.
Learn more about Capital Quickly’s Business Lines of Credit and other services by calling us at 1-888-709-7446 or email us to find out how we can help you.