A pre-approved line of credit is a form of financial assistance offered by both NBFCs and traditional financial institutions. It is typically offered to borrowers with excellent repayment records and high credit scores. This type of credit line streamlines the loan application and processing procedures, enabling business owners to obtain significant funding quickly and maintain sufficient cash flow.
Lenders typically conduct a soft credit inquiry and review your payment history to determine if you are eligible for a pre-approved offer. They will assess your credit score to ensure that it meets their lending criteria and also check your current balance and payment history. If your credit score and payment history meet the lender’s standards, they will then send you a notice of pre-approval.
How effective is a pre-approved line of credit for businesses?
One of the main notable features of pre-approved lines of credit over a regular loan is that borrowers will only have to pay interest on the withdrawn amount and not on the entire approved credit limit.
It is similar to that of a credit card; in a pre-approved line of credit business owners can access the funds whenever they want. Such financing options make it easy for businesses to tide over uncertain times like lean periods. It helps businesses have quick access to short-term capital and ensure they have adequate resources to carry out day-to-day business operations.
When to use a pre-approved line of credit?
Business owners often encounter unforeseen expenses, and having access to a pre-approved line of credit can help them navigate these challenges more easily. A pre-approved line of credit provides businesses with a predetermined amount of funding that they can use to purchase inventory, finance marketing campaigns, and cover seasonal cash flow gaps effectively.
Pre-approved lines of credit are not intended for acquiring assets, but rather for financing expenses that banks typically do not underwrite loans for. They can be especially beneficial when upfront costs are unknown, or when a significant cost needs to be covered quickly.
By using a pre-approved line of credit for these types of expenses, business owners can help ensure that their operations run smoothly and that they have the resources they need to grow and succeed. However, it’s important to remember that a pre-approved line of credit is not free money and should be used responsibly, with a plan in place to repay the funds in a timely manner.
Reasons businesses choose pre-approved lines of credit
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Instant availability of credit
A pre-approved line of credit is typically offered to existing customers of a financial institution, which means that the lender is already familiar with the borrower’s repayment potential and credit history. As a result, the loan disbursal process is typically faster, which can help businesses address financial needs more quickly.
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Competitive interest rates
Lenders typically offer a competitive interest rate on pre-approved lines of credit, as they have already evaluated the borrower’s creditworthiness and repayment history. This allows borrowers to save on borrowing costs and allocate the funds towards other business operations.
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No documentation
A significant advantage of pre-approved lines of credit is that borrowers can access them without having to go through a lengthy documentation process. This is because these lines of credit are typically offered to existing customers, and lenders already have the necessary documentation on file. In the event that additional documentation is required, borrowers can often submit it online, further streamlining the process.
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Zero collateral
One of the significant benefits of pre-approved lines of credit is that borrowers are not required to pledge any of their valuable assets as collateral. This is particularly advantageous for young entrepreneurs, new businesses, or those who do not have assets to offer as security.
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Higher loan amount
Lenders typically offer pre-approved lines of credit to borrowers who demonstrate financial responsibility and a good repayment history. As a result, borrowers who qualify for a pre-approved line of credit may have a higher chance of being approved for a larger loan amount, which can be particularly helpful when facing unexpected or significant expenses.
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Exemption from hidden charges
Lenders might waive additional charges like foreclosure fees, processing fees, prepayment penalties etc., on the pre-approved line of credit. However, this differs from lender to lender.
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Increased flexibility and customisability
Pre-approved lines of credit are generally personalised. Hence borrowers can enjoy flexibility, unlike a closed-end loan which one can use for a specific purpose. So, borrowers can use the sanctioned amount to cover payroll, purchase inventory, etc. They can opt for a repayment tenure that best suits their financial position and goals. The flexibility that comes along with these financing choices ensures that availing an external credit option never turns out to be a burden.
Frequently Asked Questions:
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Does a pre-approved line of credit affect credit score?
Lenders, such as Razorpay, do a soft credit check during the pre-approved loan application process which does not affect credit scores.
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What does pre-approved credit limit increase refer to?
When lenders offer borrowers a credit limit increase, it is typically an indication that the borrowers have demonstrated financial responsibility and reliability. Prior to extending a credit limit increase, lenders may conduct a soft credit check to ensure that the borrowers meet their eligibility criteria.
