The Cost and Benefit of Business Lines of Credit

When selecting a business line of credit, a company might be tempted to select a lender who can provide an immediate solution, especially if there is a pressing financial need. A strategic and prudent approach could be to assess the cost and benefit of lines of credit options before making a decision. This way, a company can potentially save itself from unnecessary expenses and complications by not rushing into a credit agreement.

 

Understand the Difference Between a Loan and a Line of Credit

 

Lines of credit differ from a loan, and understanding the distinction between the two can help a business owner decide which type of financing to choose. A loan provides a lump amount of funds that is paid back over a fixed period of time. A credit line offers a specified amount from which borrowers can draw and make repay in installments. Additionally, a business can opt to keep its line of credit untouched and utilize it as needed.

 

Study the Terms and Conditions

 

When a business only requires access to funds for monetary shortfalls or special circumstances, then access to credit could be a sensible decision. By planning ahead before a need arises, a company can take time to consider credit choices and avoid taking the first offer and possibly incurring costly terms and conditions. When comparing options and credit amounts, a business should consider criteria such as the interest rate, annualized percentage rate, repayment structure, penalties, and contract duration. A thorough understanding of the credit agreement can avoid costly mistakes.

 

Consider the Benefits

 

A line of credit can offer businesses financial relief and flexibility. While the amount extended depends upon several factors, credit provides businesses with access to funds as needs arise. A company can choose to use any amount up to the limit of its credit and repay the debt over time or in one payment. This can help companies manage cash flow and expenses when a revenue shortfall occurs or an immediate need arises. A company might even want to consider the advantage of having a credit line set up in case of a financial emergency.

 

Lines of credit can be an effective way to manage business finances. When options can be researched and favorable terms offered, a business can obtain credit with access to funds at reasonable rates. Just as consumers should sensibly manage their personal credit, businesses may want to view their credit as an asset to be allocated with discretion.

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