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Pros and Cons of a Business Line of Credit

You have done a bit of research on the different types of funding, and you decide a business line of credit is the way to go. Awesome! One of the important homework pieces for you in the funding process is to do your research. That is, understand the pros and cons of the funding you are looking at receiving to determine if it really is the best option for you. Oh, and just because you think it would be the best option for you, don’t be surprised if a funding company talks you into a different type of program. Just remember, they are looking out for your best interest and want to be sure you can still operate your business successfully with the funds you need.

Benefits of a Business Line of Credit

1. Take what you need

It is as simple as that… only take the amount of money you need immediately for your business. So, if you get approved for, let’s say $50,000 but you only need $5,000 right now, then you can take just the $5,000. The next benefit outlines why that could be a great choice.

2. Only pay for what you use

Yep, that’s right. Going back to our example, if you took the entire $50,000 to use for your business up front, you would have to start paying it back immediately. But if you only take the $5,000 you need right now, you only have to pay back on that $5,000. Make sense?

3. Access whenever you need more

Mhm! You took $5,000 and realized you need another $10,000. That’s fine! Take that $10,000 and use it, you have the line of credit you need in order to do that. It is your money so you can access it whenever you need, meaning you don’t need to call the funding company to get more money or have to re-apply.

4. Builds credit for your business

Did you know that business credit and personal credit are different? Your business needs to build credit too, and a business line of credit is a great option to build credit for your business. It won’t affect your personal credit so it won’t affect your debt-to-income (DTI).

Things to Consider with a Business Line of Credit

1. Expensive

We won’t sugar-coat it (though we do love sweets!) the repayment terms on a business line of credit can be expensive (subjectively) depending on what you qualify for. The specific repayment terms or rates should be discussed with the funding company before signing any documents.

2. Harder to qualify for

Remember how I said earlier to not be surprised if a funding company talks you into a different program? It is because a business line of credit can be more difficult to qualify for.

3. No guarantee on limit qualification

Just because you need $50,000 doesn’t mean you will be approved for $50,000. Just like any other type of loan, you need to qualify for the amount you apply for. For example, some funding companies are reluctant to fund a large amount to a first-time applicant.

4. Easy to misuse

Having all that money available can be hard to resist sometimes. It is easy to think, “I have the money available, might as well use it!” so that’s exactly what you run the risk of doing. Now, I don’t mean misuse in that you are going to spend the funds on things you shouldn’t (though you should be careful of that, too…) I’m saying that it’s easy to use the money if you have access to it. If your credit card has a $15,000 limit, are you going to go spend that $15,000 immediately? We hope not.

Wrapping Up

Knowing your options as it pertains to different funding solutions is an important part of your journey to get money for your business. This article helps identify the pros and cons of a business line of credit. It’s not meant to deter you, it is meant as an educational piece to help you understand what is involved in one of these funding options. Of course, there may be more pros and cons and we suggest you do additional research if you are having doubts on whether or not you should get one. If you would like to discuss your options for a business line of credit, speak to one of our funding advisors today! Your business is unique and we specialize in making sure we understand your business needs so we can customize a solution that will be the best option for your business.

This content is for educational or informational purposes only and should not be taken as legal or financial advice. The information in this content does not necessarily reflect the views of Coast Funding Services LLC or its partners.