If you’re an agency or business, access to a consistent cash flow is key. You may need access to working capital to cover costs associated with your business, like paying your employees, paying your vendors, or investing in growth opportunities. This is especially true for businesses and agencies who often deal with late or missing payments from clients – a pain point that’s not uncommon to those in the creator economy and creative industries. 

Oftentimes business or agency owners will consider taking out a small business loan, but there are a lot of hidden costs and responsibilities that banking institutions don’t disclose upfront. Another option is taking out a line of credit. A line of credit works similar to a credit card. It’s a loan offered up to a defined amount that can be accessed as needed and paid back immediately or overtime. Businesses have been doing this for years to help them meet working capital requirements and gain access to immediate cash flow. 

Whether you’re looking to scale or invest in your business or agency and need access to working capital, this article will outline the five reasons why you should rethink using a line of credit for your agency or business. 

1. Lines of credit are unsecured loans. 

Like any loan product, there are pros and cons. It’s helpful to know that business lines of credit are usually riskier because they are unsecured loans, and if not managed skillfully, they can come with negative consequences. Unsecured lines of credit are not tied to any collateral and lenders only look at factors like credit score and credit history to determine that you’re equipped to pay the line of credit back. 

2. Higher interest rates could mean your line of credit costs more. 

Unlike taking out a traditional loan, which is typically for a fixed amount and fixed time, a line of credit is more flexible with a variable rate of interest. Interest is charged on a line of credit as soon as the money is borrowed. So, when interest rates are on the rise, as they are now, your line of credit will cost more. And, in most cases, interest on a line of credit is not tax deductible. 

3. You’re responsible for the debt incurred by your agency or business.

When taking out a line of credit, most lenders or financial institutions will require a credit history. Be prepared to understand what your responsibility is when assuming the risk for your business if a lender asks to see your credit history. This will require you to be comfortable with the worst case scenario should you not have the money to pay a lender back. Ultimately your personal finances could be at risk, and you may have to dip into your savings or refinance a mortgage. 

4. Some banks charge additional fees.

For anyone looking to borrow money in general, you’ll want to be aware of all the costs that are associated with it. If you’re unsure of whether you need to use a line of credit, it’s best to hold off as banks and lenders will charge a monthly or annual maintenance fee if you don’t use the line of credit. In many instances, borrowers are often surprised by the fees associated with using a line of credit. 

5. A business line of credit will have certain qualifications before approval. 

A business line of credit works the same as other lines of credit. However, a business line of credit does require certain qualifications, and the credit limit can be lower than a traditional term loan. To qualify, your business will need to have been around for a minimum of six months and show $25,000 in annual revenue. 

While business financing is not a walk in the park and, at times, can be a confusing and long process, there are easier and more accessible options that are worth exploring. As the payments solution for the creator economy, Lumanu helps businesses with easy access to immediate working capital. When considering whether or not your business or agency should take out a line of credit, consider what your immediate needs are. Lumanu Instant Pay gives you immediate access to cash to pay your vendors and employees, invest in scaling your business, and much more without having to resort to a line of credit or other loan products. 

Interested in learning more about Lumanu Instant Pay? Contact us!