New business owners should think about opening a line of credit. In fact, you should think about a line of credit before you start your new business. That’s when you still have job security and all the other things that make banks happy.
A line of credit can help your new consulting business survive — assuming you use it wisely. One reason why businesses fail is undercapitalization. To break even, you need to be able to earn enough money to cover your fixed costs and variable costs. As a new consultant, it’s often tempting to underprice your services to win new business. You must be careful that you don’t set consulting fees so low that, even at full capacity, you’d have a hard time breaking even. If you price too low, fail to get enough hours, cycle through feast and famine periods, or have clients who fail to pay you (on time or ever!), you may find yourself cash-strapped. And the last thing you want to do is start financing your business using a credit card.
Tons of new businesses get by with credit cards. But that’s a terrible idea. The interest rates on credit cards are usually very high. And you have to pay interest on the original charge until you’ve paid off the entire amount — that means your $30 printer cartridge is going to see interest on the full $30, even if you only owe $1. A late or missed credit card payment can also result in fees, higher interest, the elimination of a grace period, and the end of any introductory special rate.
If you’re looking at starting a new business, consider a line of credit. The interest rate is usually much lower than on a credit card. You might also want to shop around to see if you can get a better rate by opening a US Small Business Administration loan — check with your local government if you’re outside the United States.
By the way, even though you might get a better rate with a home equity line of credit, you should think about whether a regular line of credit might be better. If you mess up your home equity loan, you may end up losing your home. As a new business owner, you’re taking enough risks already. Tread carefully.
Remember, ConsultantJournal.com and its contributors only provide general information, not advice. Talk to a financial advisor, accountant and lawyer if you need business advice.
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“New business line of credit” from Become a Consultant Blog at ConsultantJournal.com.