Lines of Credit: An Alternative Form of Financing
Sometimes a small business needs a large loan to cover a certain expenditure. For this a conventional SBA loan may do the trick. However, small business owners may want to have an alternative form of financing as a backup plan or on an as needed basis. This is where lines of credit come in. Let’s look at the basics, advantages, and disadvantages of lines of credit.
What are Business Lines of Credit?
A business line of credit is basically an amount of money a business is qualified to borrow on a revolving basis. It can be used on an as needed basis up to the limit and is paid back periodically. Like a credit card, interest applies, but only on the amount borrowed for that period. Once the money is paid back, it can be borrowed again. Interest rates on lines of credit can be much lower than a typical credit card and with good credit and proven success in your business, can be much lower than 10%.
What are the Advantages of Business Lines of Credit?
There are several advantages to lines of credit.
• You only borrow what you need, rather than a lump sum.
• Repayment terms are flexible and only the minimum payment can be paid if necessary in a slow period.
• Interest rates are lower than credit cards.
• Business and personal expenses are easily separated.
• You can build your business’ credit with a positive payment history, which can be an advantage in securing other types of financing.
• The cash can be used for various purposes, whereas with a conventional loan it can be used for only one purpose.
What are the Disadvantages of Business Lines of Credit?
There are some disadvantages to lines of credit.
• Establishing the line of credit requires up front fees.
• You must pay interest on the money you borrow.
• Taking on debt can be risky for small businesses especially if things don’t go as planned.
• Default penalties can be steep with business lines of credit.
Overall, lines of credit can be a great way for small businesses to increase their cash flow and have the money they need to purchase items or cover business expenses. As you consider funding your business, give this alternative form of financing a look!