Lines of credit can be exceptionally advantageous when funding small businesses. Along with their benefits, though, come some thorny drawbacks. Whether these disadvantages outstrip their positives depends on your situation. Here are a few features of these loans that applicants must consider.
Benefits of Credit Lines
These financial tools are ideal for ventures with fluctuating cash flows. For those that anticipate seasonal rushes followed by sustained dry spells, they are often perfect. Having easily accessible credit helps assure that payroll is taken care of and doors remain open. Plus, additional funding flexibility means you’ll be able to take advantage of sudden business opportunities as soon as they appear.
Another benefit is that you only have to pay interest on dollars you use. Unlike with many other loans, monies not withdrawn do not accrue charges. Depending on the agreement you sign, you might even be able to pay off the interest ahead of time without incurring a prepayment penalty.
Finally, lines of credit are great for building your credit history. As long as you’re responsible when it comes to paying off your loan, you’ll receive all the benefits that come with having a solid credit score.
Drawbacks of Credit Lines
Unfortunately, these funds are a challenge to secure. To access one, you’ll need to provide comprehensive tax returns, as well as business planning documentation. In some cases, you may even have to undergo an annual review to keep your line active. Without at least two years of business activity, getting one might be impossible.
These financial agreements come with fees. Don’t let their low interest rates fool you; their additional charges might make other funding alternatives more affordable.
Additionally, low credit limits are another unappealing characteristic. Because of them, you may need to seek additional sources of cash if a hefty expense unexpectedly comes your way. If this possibility applies to you, it may be sensible to favor a traditional bank loan.
There’s also the potential for fiscal trouble. Misusing the money you’re granted access to could cause you to fall into significant debt. When this happens, it can become impossible to dig your way out, pushing you into bankruptcy. Only use these funds to satisfy short-term cash flow needs and shortages.
Money is the lifeblood of every startup, and lines of credit are often the solution. However, they aren’t always appropriate under all circumstances. Carefully weigh their characteristics before agreeing to one in your name.