Pros and Cons of a Business Line of Credit for eSellers Make an informed decision!
Changes in demand and unpredictable expenses are just a couple of reasons why eSellers may consider a business line of credit. Aside from providing security, access to working capital is one of the best ways to maintain a competitive edge and so it is easy to see how this option is an appealing one. Here are some pros and cons to consider:
- Accessible funds: Once you have obtained a business line of credit, you can quickly access funds whenever you need to and use them however you want. Like a credit card, you may withdraw funds as often as you want, so long as you don’t exceed the maximum limit.
- Less expensive than other financing options: Unlike a term loan, interest on a business line of credit will only be charged when funds are accessed. Since the line of credit is revolving, the more you pay it down, the less interest you’ll be charged. This can make a business line of credit less expensive than a term loan, for which interest is charged at the outset and prepayment penalties apply.
- Saves time later: Business lines of credit do not usually require a reason for funding, which can often be the case with a term loan. Therefore, if you decide to grow your business, take it in a new direction, or make a small capital investment, you won’t have to reapply for a loan every time you “borrow” money.
- Relieves cash crunches: Businesses may also choose to use their line of credit to offset short-term decreases in cash flow or take advantage of upcoming peak demand periods.
- Can help build good credit when used responsibly: Using a business line of credit responsibly can build a good credit history and increase your credit rating, making it easier to apply for a loan later if it becomes necessary.
- Not so easy to get if you are a new or small business: In order to qualify for a business line of credit, a merchant will likely be required to show a history of strong revenues for the past few years. And a small business will likely have to have its accounts, in good standing, with the lending institution. Otherwise the arrangement may not be deemed worthwhile to the lender. Neither of these factors is helpful to a burgeoning business trying to grow.
- Still comes with expenses: A business line of credit does have upfront fees. Other fees may include late-payment fees, maintenance fees, and withdrawal fees. And, of course, there is the interest on the money that is withdrawn.
- There are risks: Withdrawing money from a line of credit does add to a business’s debt. If withdrawals and payments are not kept in check, small business owners could find themselves on a slippery slope. At any time, a lender can choose to reduce or close a line of credit, leaving owners in the lurch. And if a business should fail, the owner may be personally liable for any outstanding balance.
The Best Financing Option
By optimizing their cash flow, eSellers can avoid cash crunches without taking on the burden or risk associated with a business line of credit. To learn why a working capital solution is the best business financing option for eSellers, check out Payoneer Capital Advance.
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