Can A Line of Credit Hurt Your Business?

What is a business line of credit?

When a business owner needs money, pursuing a business line of credit is sometimes unavailable. Typically, individuals seek a traditional fixed or variable rate loan, using a credit card, or raising investments. Corporations have used credit lines for years to meet requirements for working capital, however, individuals and small-medium-sized business owners have not. In part, this response could be due to banks not making lines of credit readily available and those seeking capital do not ask.

How does a business line of credit work?

So, what is a line of credit? A line of credit is a flexible loan from a financial institution that consists of a balance amount which is the maximum amount that can be drawn from the credit line. Funds are readily available when you want and how you want to use the capital. Now, the underlying nature of a line of credit can be a double-edged sword. Simply put, you only pay interest on the capital borrowed. For example, if you have a maximum balance of $10,000 and only put $1,000 of capital to work you would only pay interest on the $1,000 borrowed. This factor is beneficial compared to a term loan because you avoid paying interest on the full amount available and these funds are refreshed every time you pay off the remaining balance.

Why business lines of credit?

Additionally, lines of credit do not require collateral and are a form of unsecured financing in the alternative lending space. The refreshing nature of revolving lines of credit breathes new meaning into business financing and paves the way of financial freedom for you and your business. Taking a term loan out every month or two can be very expensive and collateral can compromise the very integrity of your business. The cost and integrity of your business can be put at risk by secured or collateralized loans and are mitigated with a low-risk revenue source that the line of credit provides.

How do I use a business line of credit?

The rule of thumb for lines of credit is to not acquire large one-time purchases. For large purchases equipment financing, a term loan, or merchant cash advance may be more suitable. A business line of credit is useful when revenue is irregular or cyclical and can help stabilize the need for capital when cash flow constraints run a rye. Business owners sometimes even use credit cards, a high-interest debt vehicle, to finance new business ventures or buy supplies and even payroll. A revolving line of credit solves these problems because it provides rapid liquidity that can be paid off whenever you need to draw on the credit line.

In summary, lines of credit can be advantageous in situations where there are repeated cash transactions, but can be detrimental for large purchases as the line of credit will be exhausted until you pay it off. At Peach State Solutions education, we seek to create an informed business person who understands the opportunities that are ahead of them and to provide solutions for your business dedicated towards your growth.