One of the most important things for the estimated 33.2 million small company owners in the US is having access to capital. With readily available funds, you can take advantage of growth prospects, which also helps with running expenditures. Businesses that are experiencing difficulties meeting their short-term financial obligations may consider establishing a line of credit as a possible option. Though they are useful, business lines of credit are not without their downsides. For your convenience, we have outlined the benefits and drawbacks of company lines of credit so you can make an informed decision.
Benefits
Less time consumption than loans
With an open line of credit, your company can quickly access the available funds when needed. Compared to constantly applying for a loan, this is far more efficient. It becomes much simpler to take advantage of chances or deal with unforeseen circumstances.
Reduced Rates
A company line of credit functions more like a credit card than a loan, which requires a single, large payment with interest calculated on the total amount due. We only compute interest on the principle amount at any given time, not on the total value of the credit line. Consequently, businesses can save money on interest payments by using a smaller portion of their available credit.
Maximized Profitability
Intermittent cash flow issues are a major challenge for many small firms. Seasonal enterprises, for instance, could have enormous growth during peak seasons and severe declines during off-seasons. On rare occasions, other small firms may find themselves in a bind if a big customer invoice goes unpaid for an extended period of time.
Small businesses can get the money they need to weather tough times with the help of a business line of credit. This means that they can pay their bills on time even if they are experiencing a temporary dip in income.
Strengthening Bonds
Lines of credit, which function similarly to credit cards, present an opportunity to establish a lasting relationship with a lender. The duration of the account’s availability to the business is contingent upon the agreement’s conditions. Consequently, a company can demonstrate to a lender its long-term commitment to responsible behavior, which could pave the way for future access to more loan products or an increase in credit line amounts.
Drawbacks
An increase in interest rates
Higher interest rates are a common feature of commercial credit lines. Some might be quite low, hovering around 8%, while others would have annual percentage rates (APRs) much higher, say 60%. Consequently, they can add up in the long run, especially if your business often has a balance.
Increasing Costs
Compared to other options, such as business loans, the costs associated with business lines of credit are sometimes higher. The total can include fees for creation, processing, and upkeep. In addition, they may build up rapidly, which may cause a company line of credit to cost more than initially anticipated.
Strict Procedure
Applying for a business line of credit is just as difficult as applying for any other type of business loan. Both the applicant and the business must be considered in terms of their creditworthiness. This leads to more stringent documentation standards and an evaluation of each party’s creditworthiness than is typical for consumer loans.
Minimal Bounds
Limits on company lines of credit are often lower than those on business loans. For this reason, a firm may find that its business lines of credit are insufficient to address its actual financial demands, especially when faced with costly obstacles.
