It is crucial to have ready access to capital if you own one of the estimated 33.2 million small enterprises in the United States. Having a steady flow of cash on hand is essential for meeting daily expenses and taking advantage of expansion possibilities. Business lines of credit may appear like a good option for individuals who are having trouble meeting their short-term financial obligations. But there are pros and cons to using a credit line for your business. The following discussion of the benefits and drawbacks of business lines of credit should help you make an informed decision.
Quicker Access Than Traditional Loans
Your company can use the available cash whenever it’s needed with an open line of credit. Compared to repeatedly applying for loans, this solution is far more efficient. Because of this, seizing chances and adapting to the unexpected are less of a challenge.
Interest Rates That Are Lower
A business line of credit functions more like a credit card than a traditional loan, which requires a lump-sum payment plus interest on the total amount borrowed. Interest is determined based only on the outstanding principle balance and not the total value of the available credit. Therefore, corporations may save money on interest by using only a portion of their credit limits.
Increased Flow of Funds
Cash flow issues are a common challenge for small organizations. Businesses that rely on the seasons, for instance, may see huge booms during the peak season but severe financial difficulties during the off-season. When a sizable client fails to pay an invoice on time, it might cause a cash flow shortfall for other small firms.
A company line of credit gives small companies the financial flexibility to weather unexpected downturns. This means they can pay bills on time even if revenue is momentarily tight.
Lines of credit are like credit cards in that they allow you to make regular payments to a lender over time. In accordance with the terms of the agreement, the account can remain open for as long as the firm continues to gain value from it. If a company can demonstrate responsible behavior to its lender over time, it may find it simpler to gain access to other loan options or to have its existing credit line increased.
A rise in interest rates
Lines of credit extended to businesses typically have a higher APR. Some may be on the low end, with APRs near 8%, while others may be on the high end, with APRs approaching 60% or greater. Therefore, they might be pricey in the long run, especially if your business often carries a balance.
Business lines of credit often feature higher interest rates and costs than other financing options. Possible costs include setting up the loan, having it processed, and keeping it active. The costs of a company line of credit can quickly build up and be much more than one might anticipate.
Getting a business line of credit is a tough procedure, as it is with many other company-focused loan products. Checking the applicant’s and the company’s creditworthiness is part of the process. This means a more thorough examination of both parties’ creditworthiness and the need for more detailed documentation than is typical for consumer loans.
The credit limit on a business line of credit is often smaller than the credit limit on a company loan. Therefore, a firm may be left with a resource that doesn’t satisfy its true demands if it relies on a business line of credit to deal with costly financial issues.