You might need cash fast, but before taking on debt it’s important to weigh the pros and cons
Small-business owners tend to have goals, plans and visions for the future. They also have challenges to face and obstacles to overcome. All of these things require money. Whether you’re trying to grow your company or overcome a surprising setback, having cash on hand is imperative. That’s as true for startups as it is for established companies. The question, then, is this: How do you ensure that your company has the kind of cash liquidity that it needs?
One option is to open a line of credit. Of course, this comes with some advantages, and also a few potential drawbacks. Make sure you consider the ins and outs of small-business credit before you open one on your own.
Considering the alternatives
One way to consider small-business credit is to weigh it against the alternatives. If your company needs cash, then it needs cash — and the three basic ways of obtaining it are to open a line of credit, take on investors or dip into personal savings.
Taking on investors comes with a huge drawback, which is that it requires you to give up at least some of your control over the company. Credit lines offer cash without any sacrifice of control, meaning you can use that cash to advance your business however you see fit. For many small-business owners, the retention of total control is reason enough to choose credit over investors.
As for dipping into personal savings — or asking friends and family members for their assistance — that’s always uncomfortable, and can sometimes mean you’re replacing professional instability with personal instability. Again, opening a line of credit will often be preferable.
Other pros and cons of small-business credit lines
Also consider these factors:
- With a line of credit, you can withdraw and use money only when you need it, as opposed to being forced to take out a lump sum at once, as with business loans. You can get the cash you need without taking on any costlier interest than is necessary.
- Responsible use of a credit line can also help you to build a strong credit history, something that can come in handy if you ever apply for additional credit or loans in the future.
- The downside is cost. There are usually some up-front fees required to open a line of credit, and of course you will also have to pay interest on whatever money you end up using.
- It should also be noted that a credit line can complicate cash flow — providing a cash infusion but also new debts that must be paid off.
- There is also some risk involved. Even if the worst happens and your business falls flat, you will still be on the hook to repay that debt.
There are some risks to weigh here, but also some significant rewards — enough that opening a line of credit is the most recommendable source of capital for many small businesses.
About the author
Amanda E. Clark is the president and editor-in-chief of Grammar Chic Inc., a full-service professional writing company. She is a published ghostwriter and editor, and currently under contract with literary agencies in Malibu, California, and Dublin, Ireland. Since founding Grammar Chic in 2008, Clark, along with her team of skilled professional writers, has offered expertise to clients in the creative, business and academic fields. The company accepts a wide range of projects and often engages in content and social media marketing, drafts resumes, press releases, web content, marketing materials and ghostwritten creative pieces. Contact Clark at www.grammarchic.net.