If you run one of the estimated 33.2 million small businesses in the United States, having access to funds is essential. Along with handling operating costs, accessible money lets you take advantage of opportunities to grow. For those with short-term cash flow challenges, business lines of credit may seem like a viable solution for handling various needs. However, business lines of credit do come with benefits and drawbacks. Here’s a look at the pros and cons of business lines of credit to help you decide if one is right for your needs.
Pros
Faster to Obtain Than Loans
With an open line of credit, your business can rapidly access the available funds at a moment’s notice. This is far quicker than having to apply for a loan every time there’s a need. As a result, it’s easier to capitalize on opportunities or handle the unexpected.
Lower Interest
While business loans involve a lump sum payment and interest payments based on the entire amount owed, business lines of credit work more like credit cards. Interest is only calculated in accordance with the current principal amount, not the value of the entire credit line. As a result, it can reduce the size of interest payments if companies only tap into part of what’s available in their credit limits.
Improved Cash Flow
Many small businesses struggle with intermittent cash flow problems. For example, seasonal businesses may have major booms during peak times of year and financial struggles during the off-season. Other small businesses may see income lag on occasion or may experience hardships if a large invoice from a client isn’t paid in a timely manner.
With a business line of credit, small businesses can access funds to cover lean times. As a result, they can handle expenses on time even if income is temporarily a challenge.
Relationship Building
Since lines of credit work like credit cards, they offer a chance to build a long-standing relationship with a lender. The account may remain open for as long as the company may benefit from it, depending on the terms in the agreement. As a result, a business may be able to show a lender that it acts responsibly over time, and that could make accessing other lending products or getting a credit line increase easier in the future.
Cons
Higher Interest Rates
Typically, business lines of credit come with higher interest rates. While some may be on the low end, coming in near 8%, others may have APRs closer to 60%, if not higher. As a result, they can be expensive over the long term, particularly if your company habitually carries a balance.
Higher Fees
In many cases, business lines of credit have more fees than alternatives like business loans. Origination, processing, and maintenance fees could all be part of the equation. And they can add up fast, making a business line of credit far more expensive than some people expect.
Rigorous Process
As with many business-focused lending products, the process of acquiring a business line of credit is rigorous. It involves examining the creditworthiness of the company and the individual who’s applying. As a result, the document requirements are more extensive than they are with most consumer loans, and the creditworthiness of both parties is assessed.
Low Limits
Typically, the limit on a business line of credit is lower than what companies see for business loans. As a result, business lines of credit may not offer enough to handle high-cost financial challenges, leaving a company with a resource that doesn’t meet its genuine needs.
