When people think of business funding, the first type that usually comes to mind is the traditional small business loan. While traditional small business loans are certainly formidable opponents to competing types of business funding, there are others such as a business line of credit that has it’s own unique set of pros and cons. What are some of the things to keep in mind when deciding whether or not to look for a business line of credit?
Pros of a Business Line of Credit
One of the biggest pros when it comes to a business line of credit is the fact that you get approved for a pre-set borrowing limit, but you don’t pay interest charges on any of it until you start to utilize some of the borrowing base. When you borrow in the form of a small business loan, you immediately start accruing interest, even if you’re not quite ready to start spending the proceeds of the loan. This is a big advantage and can be quite useful if you’re in the planning stages and you’re not quite ready to borrow but you want to be able to pull the trigger when you are ready.
Drawbacks to a Business Line of Credit
Of course nothing can have such a strong up side without having any down side at all. Business lines of credit are no different. While you can save a lot of money based on the fact that you don’t start paying interest immediately, you would technically be better of just timing your transaction more effectively. Small business loans tend to have much lower interest rates than business lines of credit. So a well timed transaction would give you the benefit of not paying unnecessary interest and at the same time would get you into a lower rate. Another thing that people tend to forget about when it comes to their business line of credit are the fees. While you can get a small business loan with virtually no additional fees, business lines of credit usually have some sort of upfront fee that you can’t get around.
Of course, everybody’s personal situation will be different, so what makes sense for one person might not make as much sense for another. As a result, you’ll see see strong demand for both types of business funding, and I wouldn’t expect either of them to go away any time soon.