A commercial line of credit allows a business to use up a certain amount of capped funds (like the use of a credit card). In order to use the money from the fund, all you need to do is ask for the money. It’s up to you to pay the amount you borrow back, and as long as you keep doing so, there is always money to borrow. The caveat for a commercial line of credit is that the funds must be used for business reasons.
A commercial line of credit is often something that is misunderstood as an option for businesses. While there are many loan options out there, determining whether or not a line of credit is right for your business is ultimately up to you (although the advice of your lender never hurts!). To make your decision a little easier when first researching, we’ve outlined some pros and cons to keep in mind:
Levels Out Cash Flow
Startups and small businesses sometimes aren’t able to quite balance expenses with their profits. Commercial lines of credit allow them to keep up with their bills while they await their receivables.
Give Businesses Flexibility
Business owners often only have a small window of time to make very important decisions. Having a line of credit gives you the chance to capitalize on fleeting opportunities while knowing you can smooth out the details afterwards.
Doesn't Require Large Borrowing Amounts
When you just need a little bit of revolving cash here and there, a large lump sum loan doesn’t make much sense. Keeping a line of credit can be easier to handle and pay off when your business is able to.
Requires an Extensive Application
Lenders want to ensure that the people (and businesses) they loan their money out to will be able to pay them back – which is why there is typically an extensive application process for any loan. Lines of credit aren’t an exception. You can expect to provide bank statements, tax returns, business documents, P&L statements, and more.
Credit Limitations Could be Low
Every line of credit has a limit, similar to what we see for credit cards (although typically, it’s a bit higher). Some businesses find that their limit is too low and need a different financing solution.
Credit Lines are Expensive
As with any loan, lines of credit also have other fees tagging along for processing, late payments, maintenance, and more. This type of option also tends to come with a higher interest rate.
Although commercial lines of credit have their downsides, they can also be a great financial resource. If you are looking at different commercial financing options and have questions about how a line of credit can benefit your business, get in touch with us today.