What Is a Revolving Line of Credit and How Does It Work?

A revolving line of credit is a type of loan that provides borrowers with access to a set amount of funds that can be borrowed and repaid multiple times. It is different from a traditional loan because it does not require you to apply for a new loan each time you need funds.

Businesses often look for alternative financing means for capital expansion to ensure they do not struggle during an imbalanced business cycle. Hence, several businesses are considering a revolving credit line as their ideal capital source in this regard.

Why is Revolving Line of Credit Important for Small Businesses?

Small businesses in India’s MSME sector face major challenges in accessing formal credit due to being considered high-risk borrowers without collateral or assets. This lack of access to credit affects the ability of these businesses to contribute to a third of the nation’s GDP, as they struggle to meet their basic expenses.

A global study by BLinC Invest found that around 40% of small enterprises’ financial needs go unfulfilled. In India, the credit gap for this sector is estimated to be around ₹25 trillion.

Alternative financing solutions, such as a revolving instant credit line, have become popular as they can be availed without any security and offer immediate temporary liquidity for new businesses with limited capital. This type of loan also allows businesses to receive funds quickly without the risk of falling into debt.

How Does Revolving Line of Credit Work?

A revolving line of credit is a type of loan that allows a borrower to repeatedly access a set amount of funds. Unlike traditional loans, a revolving line of credit is not a one-time lump sum payment, but instead is a continuous source of funding that the borrower can access as needed.

Here’s how it works: A lender evaluates the borrower’s application and sanctions a specific credit limit. A revolving credit account is then opened in the borrower’s name. The borrower can then take out a portion of the permitted credit limit as a loan whenever needed during the business cycle.

The borrower can repeatedly access funds as long as the credit limit has not been exhausted. As the borrower pays down the balance, the amount, minus fees and interest charges, is automatically added back to the total credit available.

For a revolving line of credit, businesses only need to pay interest on the amount they have drawn, reducing their overall cash outflow. And unlike traditional loans, a revolving line of credit does not require collateral, making it an attractive option for businesses with limited assets.

It also provides businesses with a flexible and convenient source of funding that they can access as needed. Whether used for working capital or to handle unexpected expenses, a revolving line of credit can help businesses grow and succeed.

Advantages of Revolving Line of Credit

Some crucial benefits of a revolving line of credit include the following.

• Flexible Repayment Structure

A business may have an urgent requirement for working capital for various reasons, such as investing in growth opportunities or paying legal fees. In these situations, quick access to funds is essential. A revolving line of credit offers a solution by allowing a business to borrow and repay credit repeatedly over a short period.

• Lenient Eligibility Parameters

Traditional banks look at several factors, like a business’s potential for success, its type, and credit score, when evaluating loan applications. A revolving line of credit, however, has simpler eligibility requirements and businesses that meet them can easily access funding regardless of other factors like a lower credit score, making it an ideal solution for small businesses.

• Positive Impact on Company Credit Report

Making timely payments on a line of credit loan can help improve a business’s credit score and increase its creditworthiness, making it easier for the company to access future funding.

• Levelling the Competitive Field

In order to compete in the global marketplace, it is important for businesses to have access to funding for advertising and marketing, which a line of credit can provide.

Razorpay Line of Credit

As a top provider of payment solutions in India, Razorpay is the go-to source for small businesses and startups looking for alternative credit lending options. With no processing fees and a starting interest rate of 1.5%, companies can benefit from opening a line of credit with Razorpay. This line of credit offers easy access to funding up to Rs. 25 lakhs with a simple application process and fast disbursement time.

Steps to Apply for Razorpay Line of Credit

You can apply for this facility by following the steps mentioned.

Step 1: Head to the Razorpay website

Step 2: Select ‘Get a Line Now’ and opt for any of these two options as it suits you:

• ‘I am new to Razorpay’
• ‘I am already a Razorpay Customer’

Step 3: Input your crucial personal information, as required

Step 4: Provide the annual turnover or revenue range of your company

Step 5: Enter the necessary data about your enterprise

Step 6: Attach this enterprise’s credit report

Step 7: Attach the primary bank account statements of this enterprise

Step 8: You will have to submit the KYC records of your company via email or submit on the dashboard once the application has been accepted

Frequently Asked Questions

Q1. What are the pre-closure charges for Razorpay Line of Credit?

Ans. When you are using this revolving credit line, the platform does not levy any pre-closure charges or penalty.

Q2. How to estimate the EMI payable for Razorpay Line of Credit?

Ans. You can use the free EMI calculator on Razorpay platform to calculate your monthly payments.

Q3. Which businesses can opt for Razorpay Line of Credit?

Ans. A business can opt for a line of credit from Razorpay as long as it:

• Is operational for a year at the minimum
• Has an annual turnover of Rs. 20 Lakhs at the least