Is a Business Credit Line Right for Your Business?
What is a Business Line of Credit?
A line of credit is almost like having a credit card for your business, only on a larger scale. You have an account with a lending institution from which you can borrow money at your discretion. The account has an upper limit and interest rate terms associated with it. Once you borrow money from the account, you’re free to use that cash as you see fit for your business.
After a certain amount of time, you pay back the amount owed on the line of credit. At that point, it stops accruing interest on the debt incurred. Many companies use this strategy to help fill in cash flow gaps in their day-to-day operations.
Advantages of a Line of Credit
One of the most attractive features of having a business line of credit is the flexibility that it offers. Compared to a traditional business loan, credit lines allow you to use them at your discretion. When you close on a business loan, you have to take all of the money at that point and then make regular payments until the debt is paid off.
By comparison, with a line of credit, you don’t have to take any money out if you choose not to. Then when you actually need the money, you can take it out and use it. The repayment terms are also more flexible. You typically have a minimum payment that must be made monthly, but beyond that you’re free to pay it back as you want to. You can also advance more money from the line of credit while you’re paying back the debt if a sudden need for cash arises. It’s a lot like having an account that you can borrow from when you need it, or leave it alone when you don’t.
Drawbacks of a Line of Credit
When you open a line of credit for your business, there are a few factors that you’ll have to think about. Depending on the terms of your line of credit, you might have fees to deal with. In some cases, you have to pay a minimum regular fee, regardless of whether you’ve taken any money out or not.
In addition to fees, you’ll also have an interest rate that accrues while you have money out. If you take a large amount of money and your line of credit comes with a high-interest rate, it’s easy to end up spending a lot of your business’s money on interest payments. While many entrepreneurs simply look at this as a cost of doing business, it’s still something to consider. The more profit that you can keep in the business, the better off your business will be overall.
Although most business owners like the idea of getting a line of credit, the credit requirements are sometimes challenging to deal with. Depending on the lender, they may prefer that your business take out a traditional loan instead of a line of credit. If you’re set on having a line of credit, you might need to shop around a bit to find the right lender for you.
Is a Line of Credit Right for You?
If your business doesn’t have consistent cash flow every single week, then opening a line of credit can be very beneficial. If you have the type of business that fluctuates with the seasons, or has a long cash flow cycle, lines of credit can be extremely helpful. However, it’s important to remember that a line of credit is not a slush fund and every dime that you take out of it must be repaid. As long as the line of credit is used responsibly, it can be a very powerful tool for any business.