Pros & Cons of Line of Credit for a Small Business

Obtaining a line of credit for your small business can provide you with emergency capital when things arise, but it can also put you in debt at a time you are trying to get your business off the ground. Lines of credit are established through financial institutions as well as the Small Business Administration in varying amounts. In deciding whether you want to obtain a line of credit for your small business, you need to decide what you will use it for and how it will be paid back.

Safety Net

A line of credit gives your business a safety net Whether you decide to jump on leasing a larger building that came vacant across the street last month, have an unexpected expense pop up, or think the time has come to hire employees, a line of credit provides a safety net for those first few months. Knowing that you can pay rent, meet payroll and repair the plumbing helps ease the stress of running a business; when you are less stressed, you are able to think more clearly.

Builds Your Credit

Using and repaying a line of credit within the terms of the loan will help you establish credit, not only with your financial institution, but also with others that you may want to obtain credit with in the future. For example, if you find a new vendor and you want to establish a credit account with him, you can use your line of credit as a reference for your solid payment track record.

Credit Dangers

Your credit can be hurt if you are unable to meet the terms of your line of credit. Once you start to fall behind on those payments, it can domino with reducing your ability to obtain credit at needed vendors, and your shipments might get delayed. This puts your business at a disadvantage because you cannot meet the customer needs and your profit margin starts to nosedive. If you decide to obtain a line of credit for your small business, it is important that you set up payments you are confident you can make each month.

Fluid Cash

A significant pro of obtaining a line of credit for your small business is the flexibility it provides. As you need the cash, you draw it from the line of credit and pay on what you borrow. With a loan, you borrow a fixed amount and if you find that is not enough, you have to re-apply and go through the qualification process again. With a line of credit you can simply go draw more from the line as long as you do not exceed your maximum amount.