Pros and Cons of Business Line of Credit
A business line of credit is a financing option similar to a credit card. A lender will set aside a pool of funds that your business is able to draw from, and you pay interest on the amount drawn. Business lines of credit are typically used for short-term expenses, such as inventory purchases, project investment, or payroll.
In this article, we go over the pros and cons of a business line of credit.
Cash Cushion During Slow Seasons
A business line of credit can help seasonal businesses maintain cash flow as it provides a cash cushion during seasonal lulls.
For example, a retail store that makes most of its sales during the holiday season may be short on cash during the other times of the year, making it difficult to make payroll. A business line of credit can help in this instance.
Cash When You Need It
You can draw funds from a business line of credit when you actually need them and pay interest only on the amount drawn. This is great for the borrower because you have control over how much money you withdraw and when you withdraw. If there is no immediate need to draw funds, then you are not stuck paying interest on borrowed money
Builds Business Credit
Using a business line of credit enables you to build a good business credit score over time, which can help your business secure other financing options in the future.
With a business line of credit, you have a wide latitude in terms of what you can use the funds for. Many business owners opt for a business line of credit because it gives them the flexibility to allocate cash where it is most needed in their businesses.
Some lenders may require an upfront fee for borrowers to obtain a business line of credit and may even charge an extra fee if you have not used the line of credit for a certain period of time.
Smaller Borrowing Limit
Compared to a term loan, the amount you can borrow from a business line of credit is typically smaller, which is optimal for working capital management and dealing with unexpected expenses but insufficient for larger investments.
Difficult to Qualify
Business lines of credit are less profitable for lenders since they have to set aside a certain amount of money but can only charge interest based on what you withdraw. This disincentive can make it difficult for business owners to be approved for a business line of credit. The application process for a business line of credit is also quite extensive compared to that of a term loan or a business credit card.
Accel Business Funding has provided business loans and business lines of credit and has funded many businesses for more than $380 million. When banks say NO, we say YES to funding in 24 hours!