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The Pros and Cons of a Small Business Line of Credit

 
A small business line of credit is a type of loan that starting small businesses can avail to finance their short-term business capital needs. There are a good number of small businesses that can make use of the benefits of a small business line of credit; good examples include those that only operate during certain seasons like summer or winter. These businesses need a loan to keep up with daily operating expenses and inventory purchases until the peak season hits again.

Requirements

Before a financial institution grants a small business line of credit loan, your business should meet a certain set of requirements. The business should be able to demonstrate a positive and stable cash flow. Many institutions check past and present business revenue performances so they can determine the maximum line of credit that your business is allowed to borrow. Businessmen who are approved for their maximum line of credit can continuously borrow and repay during the entire duration of the loan term.

Pros

The funds in a business line of credit are often unsecured. Unsecured funds means that you don't need to have collateral such as a personal property to make use of it. You don't have to worry about losing a property in cases when you can't pay the loan on time.

As compared to other types of business loans where you're given a lump sum of money and pay the interest of the full amount, a line of credit is more flexible. It works like a credit card and you only pay for the interest of the amount used. You are free to decide on how much funds you need for a certain period.

A line of credit may be open for a longer period of time than regular small business loans. This will give you the advantage of having the funds for your business on a constant basis, and you don't need to reapply again.

Finally, a line of credit for your small business will help you build good credit ratings over the years. Make it a point to pay your monthly dues on time, as this will have a huge impact on your credit history.

Cons

Aside from interest rates that you need to pay, some banks will require you to pay an annual maintenance fee and other transaction fees. These fees do not usually apply to small business loans. Interest rates for lines of credit are usually based on how much you have borrowed which may have a negative effect on your profit margin.

Some banks or financial institutions do not grant lines of credit unless you are already in business for a minimum of 2 years. This may prove difficult for starting small businesses.

You may be tempted to max out your line of credit, which can add up your business debts. If this is the case, getting a business loan would be a more viable option as you have already determined and withdrawn a lump sum of money.

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