BUSINESS
Pros & Cons of a Business Line of Credit
You’ve probably received dozens or even hundreds of offers from different business credit lines. They arrive in the post, via email, through phone calls, and appear on your social media pages. They are big business, with a capital B.
Business lines of credit are excellent financial products, as they can be valuable assets to a growing business. However, they come with risks and disadvantages. This article will examine both sides to determine if you should get a line of business credit.
What is a Business Line of Credit (BLC)?
A business line of credit is most similar to a credit card for businesses. You are given a maximum amount and can withdraw money as needed. You make a monthly minimum payment based on the loan balance.
Business loan, on the other hand, work more like mortgages or auto loans: you borrow a lump sum from a bank and then make monthly payments until you pay it off.
Business Lines of Credit: Pros
Small business credit lines are very popular. Your business can benefit from distinct and valuable advantages. The most important ones are:
- Even Out Cash Flow
Small businesses, in particular, need to juggle their finances when income is slightly below expenses. You can pay your bills promptly and receive automatic discounts with a business line of credit.- Similar to seasonal businesses, a line of credit can be used when cash flow from peak periods is not enough to get through lean months.
- You can draw money when business is slow and repay it when the crowds return.
- The Ability to Pay Only for What You Need
Business loans are lump sums based on the amount you believe you will need to run your business. It is rarely the exact amount.- If you underestimate, you will need to scramble to achieve your business goals.
- If you overestimate, you’ll pay interest and fees for money you didn’t need, making the investment less efficient.
- These Tools Allow You to Seize Opportunities
Your business may have opportunities to advertise, participate in events, open new branches, or benefit from bulk pricing on supplies and inventory.- You might miss out on these opportunities if your cash flow is poor at the time.
- A credit line allows you to take advantage of these opportunities.
- They Help You Build a Relationship with the Lender
Lines of credit are like credit cards but require additional steps to check the balance.- These steps usually connect you with a customer service representative or decision-maker at the bank or credit union.
- This regular contact makes it easier to obtain other loans from the same institution in the future.
Business Lines of Credit: Cons
Business lines of credit have their strengths, but they also have weaknesses, risks, and hassles. Consider the following:
- The Cost of These Products Can Be High
Business credit lines often have high interest rates, usually in the double-digit range of APR, sometimes even exceeding 20%.- Many lines have hidden fees for initiation, maintenance, and processing, as well as penalties for late payments and non-sufficient funds (NSF).
- Be sure to read the fine print before accepting a credit line.
- There Are Wolves
Each decade seems to have its own financial fraud.- In the 1980s, there were junk bonds; in the 2000s, subprime mortgages; and in 2010, business credit lines were introduced.
- Not all business credit lines are predatory, but some may have high rates of interest or predatory policies. Exercise caution, especially with unsolicited offers.
- The Application Process Is Time-Consuming
To apply for a business line of credit, you will need:- Bank statements
- Personal bank statements
- Individual tax returns
- Business tax returns
- Recent profit and loss (P&L) statements
- Business documents (such as articles of incorporation)
- Resumes for leadership
- This process involves many moving parts and is more complex than applying for an installment loan or a credit card.
- You Can Be Tempted by Them
While a line of credit allows you to act on opportunities, it can also lead to overborrowing.- If you take on too many opportunities, you may “accidentally” borrow too much and use your profits for interest payments.
- Consider these lines only if you are disciplined and have financial systems in place.
- Limits Can Be Low
Most business lines of credit have limits that are higher than credit cards but lower than installment loans.- It is not advisable to use a line of credit with a lower limit than you need, as this can lead to accumulating debt and failing to achieve your goals.
Conclusion
It is not possible to say with certainty whether your business will benefit from a line of business credit. Each business and situation is unique.
By carefully considering the information provided above, you will be better equipped to make the best decision for your business regarding this useful but risky financial instrument.