Cash flow can fluctuate even for well-established businesses. Bills are due whether you have cash, nor not so that is why people turn to a personal line of credit to fill in cash flow gaps. Understanding the pros and cons of using a personal line credit will allow you to see if it is the right type of financing for you, how to utilize it, and compare it to other business financing options.
The Pros of Using a Personal Line of Credit for Business
Pay your bills
If you have a hefty bill to pay but do not have the cash on hand, you are in trouble. A personal line of credit will allow you to have immediate access to cash that you can use how you want and when you want.
Less requirements than a business line of credit
Business lines of credit ten to have more requirements than personal lines of credit. Traditional lenders will require businesses to have strong revenue and at least a few years of history to qualify for a business line of credit.
Underwrites are more likely to approve those who have a strong credit history, a good relationship with the bank and verifiable earnings.
Pay only for what you use
With a term loan, you will be given a set amount of money, unlike a personal line of credit. Instead of paying interest on al ump sum of money, you will pay only interest on the money you use. This is the reason a line of credit was such an effective tool for evening out cash flow.
You have security in knowing that anytime you need cash, you can tap your line of credit to the bridge gap with a line of credit.
The Cons of Using a Personal Line of Credit for Business
It is damaging if not used properly
Sometimes people will use a personal line of credit incorrectly, such as paying for a vacation they cannot afford. A personal line of credit requires you to be very careful how to use it. Otherwise, you run the risk of getting stuck with high interest debt.
Mixes personal funds with business finances
Be care if you choose to mix your personal credit with your business. it can cause problems when filing your taxes, especially if you are not diligent about keeping personal and business expenses separate.
When you use a personal line of credit, you run the risk of ruining your personal credit score. This is true if you use most of the funds available through your line of credit because your credit utilization score will increase.
More expensive than traditional secured loans
You do not need to put up collateral to secure the loan since personal lines of credit are unsecured. Lenders cannot seize your assets for your failure to pay, so they will charge more interest than they would for a traditional secured loan.
The Bottom Line
Approach using a personal line of credit for business expenses with caution. It is a great tool when it is used properly, but if it is not, it can hurt you in the long run. If you pay back what you borrow in full and in a timely manner, you will build your personal credit.