It is imperative that your small business have an ample amount of cash flow. This is important to keep your business running and well-maintained. This is one of the biggest reasons why business owners apply for a business line of credit. While it can be a great option to finance expenses within your business, it is important that you review the pros and cons before applying.
What is a Business Line of Credit?
If you are wondering how exactly a business line of credit works, it is similar to a credit card. You have the ability to use it whenever you’d like as long as you don’t go over your credit limit that was established. You can even withdraw cash that you need to pay for your expenses with a line of credit. This is probably the main difference between a business credit card and a line of credit. As a business owner, you will receive the cash you need to take care of expenses that you wouldn’t be able to purchase using a credit card.
Pros of a Business Line of Credit
Here are some of the pros of having a business line of credit:
- Improves your cash flow during slow periods– The best tool for most businesses to balance their cash flow is through a line of credit. Since you are not able to use a credit card to pay your employees, a line of credit is beneficial if your business is short on cash throughout slow seasons.
- Only pay for what you use– Once you receive your line of credit, you will only be charged for interest on the amount you use.
- Builds business credit– This is probably one of the most favorable benefits of a small business line of credit. You can build your business credit history. This is a great way to boost your score or maintain it.
Cons of a Business Line of Credit
As with any type of financial source, there are downsides, with a line of credit being no exception. Here are some of the cons of having a business line of credit:
- Additional fees and charges– Always conduct your research early on and don’t be one of those business owners that get drawn in by low-interest rates and later get slapped with many fees.
- Hard to qualify for– You will need to make sure that you supply an ample amount of financial statements that show your business’s annual revenue and cash flow in order to be eligible for a line of credit. Additionally, you will be asked to provide your bank account info, business, and personal tax returns, checking account info, business planning info, and more.
- May Misuse the funds– You can use a business line of credit as you wish, but it should only be used for cash flow shortages. If you decide to use it for anything other than that purpose, it may be a disaster waiting to happen.
- Low limits for borrowing– Business lines of credit are typically only available in low borrowing amounts. This means that if you need new business equipment or other business expenses that may be costly, you may be better off applying for a business loan.