Advantages and Disadvantages of Lines of Credit
Many things can affect your daily revenue, making it sometimes challenging to have the working capital you need to meet daily expense obligations. Business lines of credit are an excellent option for financing operational needs and other short-term costs. However, you should understand the pros and cons before choosing this type of financing.
Like a business credit card, a credit line provides access to an established amount of funds. You can draw out any amount within the bank’s limit to cover business expenses as you see fit. Then, you make scheduled repayments of the borrowed amounts with interest. Once you pay, the cash amount becomes available for future use. This financing method gives you the flexibility to use the money as needed.
If you lack the cash to meet necessary daily expenses, your business will suffer in many ways. You need to have the ability to pay your utility bills and afford payroll expenses, even when revenue is low. A line of credit can offer many benefits when facing short-term monetary concerns.
Consider the following advantages when deciding if a line of credit is suitable for your business:
- Paying for what you use: With a credit line, you only pay interest on the money you draw from your credit limit.
- Building your credit: Getting traditional loans requires a longstanding good credit history. A line of credit can help you establish credit that boosts your scores and gives you more financial options in the future if you make the required payments on time.
- Taking advantage of opportunities: Your company may have a limited time to access offers that further your professional growth. A credit line can give you the cash necessary to keep forward motion.
Any borrowing has potential drawbacks that may make it undesirable for your needs and goals. Some cons of lines of credit include the following:
- Qualifying for funding: Many banks require two years of business history to apply for this assistance. You must also provide many financial details. Lenders typically ask for tax returns, bank statements, profit and loss statements, annual revenue information, and a written business plan.
- Paying fees: Some lenders tack on significant fees for business credit lines. You must research and compare banks before choosing how you will fund your business expenses.
- Acquiring the capital you need: This funding type generally has a low borrowing limit. Consider looking into other loan options if you have a considerable expense.
A business line of credit can provide access to cash during periods of low revenue. However, it is best to review your needs and the financing structure to understand the benefits and the drawbacks before moving forward.