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The Pros and Cons of a Business Line of Credit

Man sitting at computer in office completing a small business loan form

If you’re looking for business financing, you might consider a business line of credit. Here’s how this facility works and the benefits of a line of credit over business loans.

What Is a Business Line of Credit?

A line of credit is a type of flexible (or revolving) lending facility. Distinguishing features of lines of credit include:

  • Like a credit card, you get a credit limit.
  • You can borrow up to this credit limit amount whenever the need arises. 
  • You then pay back the credit so you can use it again when you wish. 

Business lines of credit are normally used to fund day-to-day matters, operating expenses, or emergencies.

How Much Credit Should a Business Have?

The answer is simple: you should only have as much credit as you need and can afford to pay back. Every business is different, so think about how much debt you’re comfortable carrying, and how you will repay any monies owed.

Business Loan vs. Business Line of Credit

A business loan is not the same as a line of credit. Let’s take a closer look:

  • A business loan is a one-off, lump sum you get from a lender. You repay the loan with interest each month until it’s paid off. 
  • A line of credit is a revolving credit facility. You’re given a credit limit and you can borrow up to that amount when you need it. It’s not unlike a credit card (although credit cards are typically used for buying physical assets e.g. business equipment).

Benefits of a Business Line of Credit

If you’re thinking about using a line of credit for your business financing, here are some credit line pros.

1. Flexible Financing

A line of credit is flexible. You can pay it back when you’re not using it, and you can draw from it spontaneously e.g. to pursue an exciting new opportunity. And as with a credit card, you don’t need to pay for a line of credit when you’re not using it, either (other than paying back any outstanding balance). 

2. Any Business Purpose

You can normally use a line of credit for any business purpose without declaring it to the lender. This gives you more freedom to use the credit as and when it’s required, for any legitimate business reason. 

Business loans are often more restrictive because you need to declare what you plan on using the money for.

3. Credit Building

Business lines of credit are similar, in principle, to personal lines of credit. 

If your business does not have much credit history, you might use a line of credit to build your credit score. Or, if you have a low score, you can sometimes use lines of credit to repair your credit history over time.  

Two businessmen shaking hands over a business loan line of credit arrangement

Downsides to a Business Line of Credit

Although there are many “pros” to lines of credit, there are some drawbacks.

1. Borrowing Limits 

As mentioned, it’s common for lines of credit to have lower borrowing limits than business loans.

If you’re looking for a small amount of financing to help you with day-to-day purchases, then a lower limit may be suitable. However, if you’re trying to finance a larger venture, or you need more cash, a line of credit may not be for you.

2. Cash Flow Difficulties

A line of credit can help you with cash flow difficulties as and when they arise. However, there’s a risk you could end up overspending because you know there’s a line of credit available. 

In the long run, this could cause more severe cash flow difficulties and you may be unable to make your repayments.  

3. Interest Rates

Business owners ought to be aware that interest rates can be higher for lines of credit than business loans. You may also have to pay numerous fees and charges such as withdrawal fees, too. 

It all depends on the terms you are offered, though – in some cases, loans are more expensive.

Business Financing | Yarrow Financial

For some, the business line of credit benefits outweigh the drawbacks. However, a line of credit is not for everyone. Consider your goals and what you can afford to repay before committing to any financial product. 

Business financing can help you grow your company and meet your objectives. If you’re seeking a finance arrangement for your company, Yarrow Financial can help. It only takes around 15 minutes to apply for a financing product and, if you’re accepted, we aim to get the money to you within 24 hours.

Looking to get a fast business loan or line of credit? Explore our website and check your rate today!

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