Starting a small business is like sailing your boat on an adventure of a lifetime. When you start a business, there are a lot of things you need to consider so that you assure a grand success of your endeavour. And money is what makes up a significant part of your considerations. It becomes a big question mark because you are always on the go to sort out your financial problem and secure the right funding for your venture. But today when there are multiple options available to business enthusiasts, it is not a difficult task to get a loan for business. Despite it, some entrepreneurs contemplate using a personal line of credit to support their businesses. So, here comes the question – is it a smart move to choose a personal line of credit for your small business? Well, let’s find it out.
What is a Personal Line of Credit?
Let’s first understand what a line of credit is. In simple terms, a personal line of credit is an amount of money that a bank says you can borrow. You can take out as much or as little as you need, and you only pay interest on what you use. It’s like having a money backup to use when you need it. You can think of it as a financial safety net that helps you when unexpected expenses arise or when additional funds are required. And this is what makes it a cost-effective solution for managing cash flow.
Benefits of Using Personal Credit Line for Small Business
Here are some benefits you can consider before availing this small business loan:
Flexibility in Usage
One of the primary advantages of utilising a personal line of credit for your small business is the flexibility it offers. Whether you need to cover operational expenses, seize a growth opportunity, or manage other fluctuations, a personal line of credit allows you to access funds when needed.
Quick Access to Money
Unlike traditional loans that basically involve a lengthy application and approval process, personal lines of credit typically offer quick access to capital. This can be quite helpful in situations where time is actually important such as finalising a time-sensitive business opportunity.
Build Personal Credit History
Responsibly managing a personal line of credit can also impact your personal credit history on the positive side. This, in turn, can be beneficial when you are looking for additional financing for your small business in the future.
Also Read: How to improve your Credit score
With a personal line of credit, you only pay interest on the amount you borrow. This can result in cost savings compared to traditional loans, where interest is charged on the entire loan amount regardless of your utilisation. Isn’t that a great deal to sign up for?
Risks and Considerations
Now with pros there comes some cons. So, here as well, you have certain risks to deal with.
Mixing Personal and Business Finances
One significant risk associated with using a personal line of credit for your small business is the mixing of personal and business finances. This can somehow complicate records and tax filings, and also may expose your personal assets to risks.
Variable Interest Rates
Personal lines of credit often come with variable interest rates, which means that the cost of borrowing can change over time. Though this can be advantageous in a low-interest situation, it brings the possibility of higher interest payments in the future.
Discipline in Repayment
When you access a credit line, you would require disciplined financial management. Because if you fail to make timely repayments, it can lead to increased debt and additional fees. It can also negatively impact your credit score.
So, if you can handle all the above-mentioned risks and are looking for a flexible credit to use, then a personal line of credit can be quite beneficial to your business. However, it again depends upon your repayment capabilities.