Running a small business often has its challenges. One of those is usually the need to get quick access to a line of working capital that can be used to deal with occasional cash flow pressures and give you what you need to help your business grow.
It is almost impossible to anticipate bumps in the road that can impact your cash flow, such as unplanned expenses, or a late invoice payment that puts your bank balance under pressure.
One of the most efficient ways to address these issues can be to arrange a business line of credit.
A business line of credit gives you access to a level of funding that your bank agrees with you. A positive aspect of this arrangement is the fact that you can use the money on an as-needed basis.
A traditional fixed-term business loan ties you down to a regular monthly payment whereas a business line of credit offers a greater degree of flexibility when it comes to how much you borrow and how quickly you pay what you owe back.
As you might expect, there are pros and cons attached to the idea of arranging a business line of credit. Here is a look at what you need to know.
Only Pay For What You Borrow
One of the most obvious positives attached to a business line of credit compared to a traditional bank loan is the fact that you will usually be borrowing what you need in a more efficient way.
You will only be paying interest on the portion of your line of credit that you actually use. That is far more cost-effective and efficient compared to borrowing a fixed sum of money on a loan and paying interest on the total balance from day one.
Fees And Rates Are Often Lower
Another positive factor of a business line of credit is that you will often end up paying a lower interest rate and lower fees than some other lending options.
The interest rate charged for your line of credit will invariably be a lot lower than credit card and because you enjoy a degree of flexibility about when you pay off the balance owed the fees you incur can often work out cheaper.
A Lack Of Discipline Can Be Costly
Debt has a nasty habit of creeping up on you and you have to be aware that you can build up a level of debt that could become difficult to repay if your business suffers a decline in sales or other challenges that impair your progress.
As with any type of lending, there are consequences attached to opening up a line of credit in the form of a business line of credit. If you miss a payment it will mean the interest charges will accumulate on the larger amount that you owe. This is a scenario that can quickly spiral out of control.
Having said that, if you are disciplined and realistic about your borrowing needs and understand how your business ticks, a business line of credit can prove to be a useful and efficient way to deal with varying cash flow demands.
A business line of credit can be an excellent borrowing solution as long as you understand how it works and how to use this form of finance to your best advantage.