Cash flow is very important to running a small business. Business lines of credit can come in handy for small businesses to increase cash flow. Here are some pros and cons of a line of credit to review before you click submit on the application. 

Business Line of Credit Defined

 In many ways, business lines of credit are like credit cards. You can use a line of credit whenever you need it, and you can’t exceed the credit limit. A line of credit is different in some ways because you can withdraw cash to cover expenses whenever needed. 

Also, note the difference between a revolving and non-revolving line of credit. With revolving credit, you can spend whenever you want, up to the credit limit. With a non-revolving line of credit, you’re receiving a lump sum that you get all at once. When you pay it off, your line of credit closes.

A Business Line of Credit Improves Cash Flow

Lines of credit can help you balance your cash flow. For instance, if you do most of your sales during a certain part of the year, you may find yourself short on cash at other times. This could lead to payroll shortages and other challenges. A business line of credit will give you the cash flow you need to get you through the slow times and back to your busy season. 

A Line of Credit Improves Your Adaptability

There may be times when an opportunity is in front of you, but you don’t have the cash to take advantage of. If you’re a manufacturer, there may be times when your suppliers’ prices are reduced, but you don’t have the cash flow needed to purchase in bulk. You can better take advantage of these times if you have a line of credit. Even with interest payments, this can save you money in the long run. 

Cons of a Business Line of Credit

There are many advantages to business lines of credit, but there are disadvantages too. One is the potential for fees. If you are short on cash to make monthly payments or go over the limit, these fees can quickly add up. Costs will vary from lender to lender and are spelled out in your terms, so make sure you know what you’re getting into. 

A business line of credit can also be difficult to qualify for. You’ll need to have financial statements showing your annual cash flow and revenue. You’ll need to show your business and personal tax returns and business plans. You also may be asked to review your credit line yearly. 

A line of credit can be important to increase cash flow for your business. Just make sure you know what you’re getting into before you sign the paperwork.