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Pros and cons of business lines of credit

It doesn’t matter if a business is just beginning or well established, having cash on hand is essential in any type of growth or expansion. A business line of credit is one tool businesses can use to accomplish their goals.

Business lines of credit work similar to a credit card. A lending institution, like a bank or credit union, will provide funding up to an established credit limit. Businesses can then borrow against the line of credit to cover any business expenses. Some purchases can’t be made with a credit card, making a line of credit more versatile.

There are two types of lines of credit: revolving and non-revolving. Revolving credit remains open regardless of when you spend or pay off your debt. A non-revolving line of credit can't be used again after it's paid off.

Here are a few pros and cons of using a line of credit, but remember that your business is unique to you. Every decision comes down to your circumstances and preferences.   


Don’t give up control of your business

Taking out a line of credit doesn’t require you to concede part of the business, which is most likely the case with investors. You also won’t have to dip into your personal savings, or ask friends and family for money. Retaining control of your business can sometimes pay huge dividends in the long run, so considering a line of credit early in the business life cycle can be advantageous.

Build credit

Just like people, small businesses need to build up credit history. A line of credit gives you another source to build up your credit (as long as used responsibly), making it easier for your business to receive capital assistance in the future.

Cash flow

The majority of businesses have a “busy season,” so lines of credit can be ideal for balancing cash flow. For example, a business that performs exterior remodels will have receive much of its revenues in the warmer months. During slower periods, lines of credit can help pay employees and other expenses.

Lines of credit also allow your business to make purchasing decisions quicker. For example, if a supplier is offering a product at a significantly reduced price, you can take advantage of the limited-time offer — that saves money in the long run.  


Charges and fees

Some lenders promise unusually low interest rates. Remember, if it sounds to good to be true, it probably is. Lines of credit with low interest rates can come ridden with numerous charges, fees and restrictions. Be sure to do your research and compare lines of credit from a variety of lenders.

Difficult to qualify for

Business lines of credit require quite a bit of paperwork: financial statements, business and personal tax returns, bank account information, business documents and, most likely, two years of business history. You’ll also undergo a yearly review to maintain the credit line.

This information is standard for many types of loans, but other financing varieties can carry shorter application turnarounds and requirements.

Potentials for misuse

Lines of credit can be enticing, but they should not be used in excess. Use them to gain a business advantage or for balancing cash flow — not to pay off other debts or dig yourself a hole you can’t get out of. It’s an insurance policy and a tool that can make your business more agile. Use it as such.  

NAWBO Member Q&A: Amy Kuhlers

Amy Kuhlers, program manager with the Iowa Economic Development Authority, provides small business assistance. As part of her role, she serves on the boards of NAWBO, spearheading statewide outreach, and on the Iowa Rural Development Council helping with issues in Iowa’s rural communities. 

Outside of work, Kuhlers is a board member for the Iowa Pet Alliance Foundation and is co-owner of G & A Ventures, providing commercial kitchen and bakery equipment.

Can you take me through your personal background?

I was raised and spent much of my life in the small, north central Iowa town of Thornton, where my family owned and operated a county newspaper and later a printing company. I took a meandering educational route, graduating initially from North Iowa Area Community College – twice. After a few years, I earned an undergraduate degree in Entrepreneurial Management from Buena Vista University and later obtained a Master of Public Administration from Drake University.

I’ve had the opportunity to explore a variety of career paths, including technology sales, insurance, non-profit management and of course, work in the printing industry. However, working with entrepreneurs and being a resource for small businesses has been my primary passion, having spent almost 20 years engaged in this field.

What is your profession/business?

For the past five years I’ve been a program manager with the Iowa Economic Development Authority leading the IASourceLink program. IASourceLink is an online resource for small businesses and aspiring entrepreneurs. The website provides technical and financial information, connections to Iowa resource providers through our Resource Navigator, licensing information through the Business License Information Center and personalized assistance through our Business Concierge services provided by partners at the University of Northern Iowa’s Center for Business Growth and Innovation.

What do you most enjoy about what you do?

Eliminating barriers businesses face by connecting owners and would-be entrepreneurs to the many small business service providers and resources available throughout Iowa. It’s said, “People don’t know what they don’t know,” and it’s true.  Individuals understand their skills and what they do best, but not necessarily how to build a business around those skills. We can help them with that first step.

If you could go back in time and tell yourself one piece of advice when you started your career, what would it be?

Break through walls! Never be afraid to push the limits of what you think you can do.

If you could have one superpower, what would it be?

If I had a superpower cape that allowed me to speak all languages and be a master at cross-cultural communication, that would be amazing. I think many of the issues we face today are the result of a lack of understanding among people and ethnicities.