Business lines of credit help small companies deal with the ebb and flow of cash flows or the seasonal demands of a business. A business line of credit enables the bootstrapped small business owner to purchase inventory or supplies in anticipation for a ramp up in productivity or a rush on future sales.
A business line of credit is a revolving financial product. It can be a good option for short-term cash flow needs. But it can also be used as a financial tool for a wide range of business expenses, such as the purchase of new equipment.
But in a number of cases, a small business owner doesn’t think about establishing a line of credit until he needs it direly. Unfortunately, waiting until it’s absolutely essential can result in a poor interest rate or unfavorable loan terms. Or worse. Waiting too long can mean the inability to get the funds needed in time. For these reasons only, it is prudent to get a business line of credit to ensure you have the capital when you need it.
Keep in mind, lenders lend money to small businesses when they feel they will utilize the money responsibly. If a lender suspects that you will use your entire line of credit all at once, he may be less inclined to approve the line of credit for your requested amount, or worse — be denied altogether.
There are a number of advantages of using a business line of credit. First, the money in a business line of credit is usually unsecured. What this means is you don’t have to offer up personal credit to use the funds. Typically, a business line of credit is open for a longer period of time than certain small business loans. Therefore, if you require ongoing funds to operate your business, there’s no need to reapply again and again.
Over time, a business line of credit can help a newly formed small business build up a good credit rating. By making sure that monthly dues are paid on time, small business owners can establish strong credit for their business.
On the other hand, there are a few cons to a business line of credit. Just as paying back on your credit line regularly and on time can have a good impact on your credit rating, missing payments or making late payments can have a detrimental effect on your credit rating. In addition, some banks charge an annual maintenance fee or transactions fees, in addition to the interest rate you must pay back. Some financial institutions require a small business to be in business for a minimum number of years, which may prove challenging for a startup.
Before deciding on obtaining a small business line of credit, learn about the pros and cons to ensure it’s the right source of funding for your business needs.