Funding your business isn’t an easy task, especially if you’re still in the beginning stages.
Many small businesses struggle to maintain a steady cash flow, and serious issues can arise if you’re not able to pay your people at the right time.
Thankfully there are a number of financial resources at your disposal to help you get business done without putting yourself in a bind.
One such resource is a business line of credit. A business line of credit (or BLoC) is a form of financing similar to a business loan, but its key difference is that you only pay interest on the portion of funds you’ve actually used.
This in itself seems to be a huge advantage of a BLoC, but is this a safe way to give your budget some padding? This article will outline some of the upsides and drawbacks of a BLoC, so you can determine for yourself if this financial aid is right for you.
One big advantage to a BLoC is the low cost. Since, unlike a business loan, you only pay interest on funds you’ve withdrawn, this option can help you cover unexpected expenses without breaking the bank. Lines of credits are also highly flexible, as they allow you more options on how to use them.
When applying for a business loan, you’ll need to give specific details about what the money will be used for. A line of credit, however, can be used to cover whatever you need, whenever you need it. This makes it perfect as a sort of inexpensive “fallback” fund something to aid you when you just need a little extra cushion to get you through the month.
A BLoC, when used properly, can also help you boost your credit rating. When you pay back on time and you’re strategic about how you use the funds, you’ll see your credit rise, which can pave the way for further business opportunities.
All these aspects are incredibly beneficial, but it’s wise to also consider the potential drawbacks of a BLoC. One such difficulty is the rigorous qualification process that candidates have to go through to actually acquire the line of credit. You’ll need to show the lender a good credit score and significant assets and cash flow things that are not always in place for businesses that are just starting out. Some lenders may even require your business to be two years or older, to ensure that you’re established and responsible.
Additionally, there are financial risks involved with a business line of credit. There are often fees associated with your loan in addition to whatever you owe monthly. And if your business slows down and you find yourself unable to make your monthly payments, you’ll rack up interest and late payments, and you’ll be responsible for repaying the debt regardless of what happens with your business.
If you’re not able to get a BLoC or you’re simply not ready to take the plunge, there are alternatives you can consider. For example, you can turn to a hard money lender for help with funding. Hard money loans use your assets as collateral, and they often have a higher interest rate; however, your credit score doesn’t play as heavy of a role in the approval process, which is helpful for small businesses that are still working on building credit.
Another route would be to use an alternative lender. This has become an increasingly popular option, as it is quick and easy to apply for these alternative loans and they generally have a shorter term length. It’s also a great choice for businesses that don’t have an extensive credit history or don’t have that many assets yet. Alternative lenders look mainly at your annual revenue and some of them even operate very similarly to a line of credit, allowing you to only withdraw and pay interest on the funds you need.
Related Article: Getting By Without a Business Loan
Assess Your Options
A business line of credit is an incredibly helpful resource to have at your disposal; however, it may not be right for every company. Look closely at the interest rates, terms, and other fine print of these various types of loans, and you can determine for yourself whether a BLoC is the way to go. With so many options from which to choose, you can find your ideal financial fit and alleviate your financial pressures.