Unlocking Business Growth: Is a business line of credit a good idea? Pros & cons
As a growing business in 2023, you’re faced with endless opportunities for growth … if you had more funding.
And there are dozens of ways you can try to access that funding — from SBA loans to equipment financing to cash advances. Options are endless… and confusing.
How do you decide whether it’s worth investing the time and effort to get approved for a business line of credit?
In this article, we’ll cover:
- the purpose of a business line of credit
- In depth pros & cons of a business line of credit versus other funding options
- A list of other financing ideas to consider
What is the purpose of a business line of credit? How does it work?
First, a definition:
Unlike a typical loan, where you take out a bulk sum of money, and repay it on a schedule, a business line of credit gives you access to a sum of funds that you can withdraw as needed — and you only pay interest on what you use.
The purpose of a business line of credit is to give you access to a “flexible” financing option.
How is it unique? The flexibility. A business line of credit is often described as a “revolving” loan, meaning the outstanding money goes up or down depending on your agreed-upon borrowing base. Most lenders will reassess how much you can get weekly, sometimes monthly or daily.
As your business grows and your stability or collateral increases, your line of credit will often increase with it.
Will my business benefit from a line of credit? Pros & Cons
Here’s a quick chart showing you the pros and cons of a business line of credit, as compared to other funding options like term loans, credit cards, factoring and cash advances.
Explore how other funding options work here →
Pros
Benefits of a business line of creditOnly pay for what you use
Borrowing funds just as needed helps you control interest expenses
Lower Interest Rates
Unlike credit cards or other short-term financing, business lines of credit offer lower rates
Constant access to working capital
Funds replenish as you pay back, giving you long-term access to money as needed
Lender relationship-building tool
Helps you build a long-term relationship with your banker, and lets them get to know your business
Zero-cost emergency back-up
It’s a safety net in a pinch, if there’s an unexpected expense or dip in revenue
Increases over time
Your line of credit often grows with your business, as you build trust and stability
Cons
Downsides of a business line of creditCollateral Requirements & Risk
As a small business, lenders may need you to provide business collateral, or risk your personal collateral, like your home, to secure credit.
Hard to get approved
As a small business, you may not meet stringent requirements, or only be approved for a very minimal amount
Overborrowing
Easy access to capital increases your risk of accumulating debt, which could be challenging to pay back
Lengthy, complex approval process
An extensive amount of paperwork is needed, and it takes at least 3 months to be approved
High fees
Although interest rates are lower, business lines of credit come with high fees — like origination, maintenance, or even early termination fees.
Bear in mind: business lines of credit impact your business’s credit score.
As long as you’re borrowing responsibly and paying back on time, your credit score will benefit. But of course, missed payments or overborrowing will hurt your credit score. That will mean that securing financing in the future will be difficult.
“What else can I do?” Other financing solutions if you can’t access a line of credit, or have an insufficient credit line
If you’re in a non-profit, or can’t qualify for a business line of credit right now, don’t put your business growth on hold.
Here are some creative alternative funding sources out there.
- Payroll funding
best for instant, short term loans, or as a zero-cost backup - Services like invoice factoring
quick and easy to qualify for. Always be cautious with this option. - Business Loans like SBA
low rates, but lengthy application process and difficult to be approved - Grants
money that you never need to repay, but that often require
hiring a writer for the lengthy application. - Equity Financing
no monthly repayment, nothing to repay financially
See more alternative funding options to a business line of credit here →
Morris Reichman
hello@payrofinance.comMorris Reichman is the founder and CEO of Payro Finance. Former Vice President at Infinity Capital Funding an alternative finance company, Morris possesses a versatile background in the finance industry. Having spent 7+ years working across global macro operations and start up corporate finance Morris's expertise is in business accounting, risk management and investment analysis. Morris founded Payro Finance to support business owners and ensure their business continuity.
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