In the ever-changing landscape of business, having access to flexible financing options is crucial for success. One such option that has gained popularity in recent years is the standby line of credit.
In this blog, we will dive deep into the meaning, advantages, application process, and more to help businesses understand how this financial tool can benefit them.
What is a standby line of credit?
It represents a pre-approved sum of money that businesses can tap into as required. This credit amount is determined by the lender after assessing the financial qualifications of the applicant, but it is limited to a predefined maximum.
As the term implies, this line of credit remains on standby, accessible only when the business needs it. Businesses have the flexibility to draw from this credit line either partially or in full while adhering to the set maximum limit.
However, it’s essential to note that standby lines of credit is designated for specific purposes, as outlined when it was established. While many Indian businesses access this facility via credit cards, other options may also be available depending on the borrower’s circumstances.
How does a standby line of credit work?
Standby lines of credit serve as a safety net for businesses, ensuring they can meet their financial commitments if they encounter a shortfall of funds. For example, a company can establish standby lines of credit with a lending partner to cover a specific payment to clients if they are unable to fulfil their contractual obligations.
This credit option can take two forms: secured (backed by collateral) or unsecured. Banks assess the financial health of the business to determine the approved credit line’s size and set a maximum limit.
In some instances, the line of credit may be revolving, meaning businesses can borrow a portion or the entirety of their credit limit, and once repaid, those funds become available again. Standby lines of credit can also benefit individuals, offering a cost-effective borrowing option that eliminates the need for reapplying every time funds are required.
Advantages of a standby line of credit for businesses
Now, let’s explore some of the key advantages that make a standby line of credit an attractive option for businesses:
1. Flexibility: Businesses can access funds as required, providing them with the flexibility to manage cash flow efficiently. Whether it’s covering operational costs, paying suppliers, or seizing growth opportunities, a standby line of credit can be a lifeline.
2. Interest only on what you use: With a standby line of credit, you only pay interest on the amount you borrow, not the entire credit limit. This can result in cost savings compared to traditional loans with fixed interest on the entire amount.
3. Quick access: Unlike the lengthy approval process of traditional loans, standby lines of credit often come with quicker approval times. Once approved, businesses can access the funds almost immediately when the need arises.
4. Revolving credit: A standby line of credit is revolving in nature. This means that as you repay the borrowed amount, the credit becomes available again, offering a continuous source of financing.
5. One-time approval: Once your standby line of credit is approved, you don’t need to reapply each time you require funds. This saves time and ensures that you have a financial safety net in place whenever you need it.
Applying for a standby line of credit
The application process for a standby line of credit may vary depending on the lender, but here are some general steps you can expect:
1. Choose a lender: Research and select a reputable financial institution or lender that offers standby lines of credit.
2. Gather documentation: Prepare the necessary documents, which typically include financial statements, business plans, and other relevant information about your business’s financial health.
3. Submit your Application: Fill out the application form provided by the lender. You may also need to specify the amount of credit you’re seeking.
4. Undergo evaluation: The lender will assess your creditworthiness and evaluate your business’s financial stability to determine the credit limit they can offer.
5. Approval and activation: Once approved, your standby line of credit will be activated, and you can start using it as needed.
Documents required for standby line of credit
Here are some documents that you may be required to furnish to avail a standby line of credit in India:
- KYC documents of the majority shareholder
- KYC documents of the business
- Statements of the owner’s primary bank account
Frequently asked questions
Q1: What is the difference between a standby line of credit and a business loan?
A1: A standby line of credit enables businesses to withdraw funds up to a maximum threshold flexibly. Moreover, borrowers can prepay the borrowed amount without any additional charges. In contrast, business loans provide a lump sum amount with fixed repayment terms.
Q2: How is interest charged on a standby line of credit?
In the case of a standby line of credit, lenders usually charge interest daily. For example, if a business withdraws funds for a period of 120 days and pays it back within 60 days, interest will be chargeable only for the 60 days.
Q3: How can businesses withdraw from a standby line of credit account?
A1: Businesses can start withdrawing from their standby line of credit when their accounts are active. They can simply log in to their accounts, enter the amount, confirm repayment details and withdraw funds.
A standby line of credit can be a valuable financial tool for businesses, providing them with the flexibility and quick access to funds they need to navigate the challenges and opportunities that arise in today’s competitive business environment. Whether you’re a small startup or an established enterprise, having a standby line of credit in place can give you peace of mind and help you seize growth opportunities as they come your way.