Lines of Credit – Pros and Cons
Whether a nonprofit organization is just getting started or has been in business for a while, cash on hand is an important factor of whether the business can accomplish its goals. Many nonprofit organizations need money to start the business, and existing organizations need money for growth and expansion. Lines of credit allow an organization to prepare for changing needs. Before you obtain a business line of credit, understand the pros and cons first to make sure it is the right source of funding for your nonprofit organization.
Cash Source With Control
A nonprofit organization line of credit provides the organization with the money it needs to try to accomplish its mission. It allows operation to continue during periods prior to cash coming in the doors, i.e. time between grant commitment and payment.
A line of credit provides flexibility to your nonprofit organization. Because a line of credit allows you to access money when you need it rather than having to take it in a lump sum like personal loan committed to the organization. It provides the cash you need without costing you more in interest. Its flexibility makes a business line of credit a useful tool for managing the cash flow of a business—using the line of credit when you need it and paying it off when income comes in to the business.
Nonprofit organizations need to build credit history to obtain future credit accounts and loans. Using a line of credit allows you to build a positive business credit history as you use the line and make the payments on time.
The costs involved in establishing and maintaining a line of credit are one of the drawbacks of a business line of credit. Establishing a line of credit requires up-front fees to obtain the line. In addition, the business must pay interest on the money it uses from the line of credit.
Cash flow can be a disadvantage as well as an advantage in taking a line of credit. When money is tight, a line of credit can create a cash infusion to a nonprofit organization, but at the same time, a line of credit is debt that has to be repaid. Repaying debt can be problematic when finances are tight.
A line of credit can also put your nonprofit organization at risk. Even if your organization fails, a line of credit is a business obligation that has to be repaid. Whether you may be personally liable to repay the debt depends on the structure of your business.