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Trying to fund your business from the get-go is no easy task. While there are plenty of alternative funding options to raising money from traditional investors, it’s often difficult to know which option is right for you. One resource you can utilize is a BLoC or Business Line of Credit. Similar to a business loan, a BLoC is essentially a loan, except you only have to pay interest on money you’ve actually spent.

Similar to credit card payments, you’ll negotiate a rate and credit line based on risks and other factors. If you’re interesting in a BLoC here are some pros and cons of this funding option.

Pros

Generally, a business line of credit is inexpensive. Since you’re only paying interest on funds you actually use, it’s easy to gauge and forecast your expenses. Contrary to a business loan, you won’t have to pay interest on a set amount from the beginning. A BLoC is a great for business owners who aren’t fully aware of forecasted expenses and need flexible spending options.

When applying for a business loan, the bank will require a very detailed business plan and expense forecast. The less detailed your plan, the higher the interest rate will be. Like most start-ups, it’s often difficult to gauge expenses from the start. By your second pivot, you may have a completely different business model. A business line of credit will serve as your financial “safety net” whenever you need it.

If you’re on top of paying your dues, you’ll begin to earn credit. As your business credit score increases, more opportunities for financing will arise. Make sure you’re well aware of interest rates and payment dates. If you’re planning on paying your statement off on-time each month, you can set up an automatic payment from your business checking account.

Cons

Like a small business loan, applying for a BLoC isn’t a walk in the park. The bank will ask to review your revenues, current credit rating, debts, and many other factors when you apply. All of these factors will govern your maximum credit available, duration of credit line, and repayment terms. Obviously, the more risk the worse deal your business will get. For existing businesses with good detailed analytics, this usually isn’t much of an issue. However, if your a new business a BLoC often doesn’t make sense fiscally given the lack of track record.

In addition to interest rates, monthly fees are often associated with a line of credit. Often times businesses fail to forecast properly and don’t account for these monthly fees. If you have a rocky couple months and there are some cash flow problems, you’ll still be held responsible for paying off the credit. You may get stuck fighting to pay off your interest rates and monthly fees rather than scaling your business. Even worse  if you get tied up in bad credit, it may close doors for another loans or funding options.

In the end of the day, it’s important to choose the right funding option for your business. Whether it’s a small business loan, BLoC, crowdfunding campaign, or a VC you’ll need to assess the pros and cons of each. If you’re considering a business line of credit make sure to take these pros and cons into account before applying.

 

I'm Chalmers and I'm the Co-Founder and CTO of Due.com.

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