As with all things that have a good side, the bad side or disadvantage associated with it must be considered and the options carefully weighed to ensure that the risks can be borne before a financial decision is made, to ensure that one does not end up on the losing end.
Having a revolving line of credit account is quite ideal in that it is very flexible, not just in its interest rates, but also in the fact that a borrower has a virtually unstoppable access to funds, a situation which goes in line with a fixed credit limit which is set and agreed upon by both parties- the borrower and the money lender.
One major drawback to having an unending access to funds is that there is a drastic reduction of monetary discipline which can lead to excessive spending and simultaneously, excessive borrowing. This lack of discipline can overtime lead to a likeness for borrowing and one may then get too reliant on these available funds, instead of working to close all avenue for borrowing and actually increasing the positive cash flow of the business. The result is that in an instance where the small business line of credit is eventually closed, the firm may be left adrift.
Another disadvantage worthy of consideration is the increased interest rate that is usually associated with a revolving line of credit. Small business lines of credit usually have a higher interest rate as compared with other loans that can be gotten from that organization. Although flexible which may blind-side the borrower, the interest rates are quite high.
There is such a thing as being too flexible. Due to the fact that no fixed payment is made, customers tend to become relaxed in their payments. This may then lead to the accumulation of debts. Over time, compound interests begin to accumulate in addition to the already fixed interests and amount owed. This may then pose a problem especially if there is no immediate availability of funds to pay off this debt. The compound interest of small business line of credit has a tendency to accumulate fast and may grow to a huge amount if it is not paid off on time.
Another disadvantage associated with the revolving line of credit is that the terms and payment policies are not fixed. Apparently, the flexibility also extends to this aspect and may pose to be quite difficult to handle. This is a problem that is mostly associated with credit cards. The lender has full rights to change the terms of payment which include your credit limit, as well as the interest rate as he so pleases. The only binds which do not count as a restrictive measure is that the lender has to notify you of the conferred changes.
Using a line of credit account is quite ideal if one has full understanding of what it really entails, which may be an added advantage in the long run.