Having a sufficient amount of cash on hand is important for businesses to achieve their goals. This is one of the reasons why startup companies apply for a startup business line of credit. With this type of financing, you can inject more cash into your company and achieve your business goals.
A business line of credit works a lot like a business credit card. The lenders establish a credit limit and you can withdraw funds from your line whenever you need to. You only have to pay for the money you’ve withdrawn, plus the interest, in monthly installments. Once you restore your credit balance, you can withdraw the funds again as needed.
But business lines of credit also come with its fair share of pros and cons. This is why you should weigh your options before applying.
- 1 Small Business Line of Credit Pros
- 2 Small Business Line of Credit Cons
- 3 Is Startup Business Line of Credit Right for You?
Small Business Line of Credit Pros
Business lines of credit offer a lot of benefits to start-up businesses. It’s no wonder why it’s the most popular financing choice among newly established companies. Here are some of the best features a business line of credit:
1. Stabilizes Cash Flow During the Slow Season
Seasonal businesses rely on peak season profits to make it through the year. When slow season comes, these companies often experience cash flow issues. This makes it difficult for them to meet their monthly payables, like payroll and rent. Since you can’t use your business credit cards for these expenses, your line of credit is the most logical solution to address this problem.
Even if your business is not seasonal, you can make use of a business line of credit. All companies, regardless of the size, experience cash flow problems from time to time. A business line of credit gives you the cash you need to pay your bills on time.
2. Helps Build Business Credit
Lenders usually review your credit report when you apply for a loan. This helps them determine the terms they can offer you. Discrepancies on your credit report could hurt your chances of a business loan approval in the future.
This is another reason to use a business line of credit. With one, you canbuild and/or improve your business credit background. As long as you pay your bills and dues on time, your line of credit will work to your advantage. Remember that your credit report reflects how responsible you are for your finances. So, a good credit report will improve your chances of getting a loan.
3. It Offers Flexibility
If you’re looking for added flexibility, consider applying for a business line of credit. You can use the funds to pay for almost any expense, such as payroll, office equipment, or renovations. It lets you take on several business opportunities without having to worry about capital.
Small Business Line of Credit Cons
Unfortunately, a business line of credit isn’t for everybody. No matter how attractive it is for start-up businesses, it also has its downsides. Here are some of them:
1. Higher Fees
There are business owners who believe they got the better end of the deal because they qualified for lower interest rates. However, they sometimes forget that hidden charges could apply for the transaction. Some lenders impose fees for account maintenance and withdrawals. So, even if the interest rates are low, these charges could pile up fast and increase the overall cost of the loan.
That is why you should always check the fine print of every proposal. Be sure that the charges, fees, and interest rates are clearly stated before you sign anything. To ensure that you get the best deal possible, you can work with a loan broker. Click here to know more. They’ll help you compare different options to determine which loan works for you.
2. Higher Potential for Misuse
Since it’s easy to access the money, many entrepreneurs often misuse their lines of credit. To be safe, it’s best to only use your line of credit to cover cash flow shortages. Inefficient use of your credit line could put your business into more debt. If this happens, you may find it hard to repay your loan and keep your cash flow steady.
Businesses with significant debts should avoid applying for a business line of credit. Getting another loan could put a strain on their finances even more. So, it’s best to postpone the application until their finances are more stable.
3. The Application Process is Time-Consuming
To qualify for a business line of credit, you have to submit several documents to potential lenders. This can include the following:
- Business Financial Statements
- Personal Financial Statements
- Business Tax Returns
- Personal Tax Returns
- Balance Sheets
- Business Plan
Is Startup Business Line of Credit Right for You?
Startup business lines of credit are a great financial resource for start-up businesses. But before moving forward with your application, be sure to know what you’re getting yourself into. Know the risks and make sure that they don’t outweigh the benefits.