The Reserve Bank of India has recently announced the inclusion of pre-sanctioned credit lines in the UPI system to promote the development of unique financial products. It is expected to benefit not only financial institutions but also businesses, especially small business owners, who will now have access to more convenient and transparent lines of credit.
Today, many start-up founders choose to opt for a line of credit (LOC) over traditional corporate loans. With 42.5 million SMEs already running their operations in India in 2023, this trend is most likely to go up in the coming years. Let’s understand how an online line of credit is different from traditional loans and how it can help businesses – both small and established.
What is Credit Line?
A credit line is a flexible credit facility that, similar to a credit card, comes with a specific credit limit. It is a revolving loan – the borrower can withdraw, repay, and withdraw again – while staying within the set limit.
Businesses can use the authorised limit in parts, as and when required. An online line of credit can help small business owners tackle sudden financial requirements – be it for inventory or salary payments. Most importantly, the interest amount is only levied on the utilised amount and not the entire credit limit.
When someone applies for a credit line in India, the financial institution assesses the risk associated before setting the maximum borrowing amount. A line of credit is particularly popular for its flexibility, simplicity, and attractive interest rates.
Understanding Different Line of Credit Loans
The most common types of credit lines in India are business, personal and home equity.
- Personal Line of Credit: Individuals can withdraw funds as and when needed. No collateral required.
- Business Credit Line: Businesses get 24/7 access to a revolving line of credit and only pay interest on the borrowed amount. Works as a business credit card but usually comes with a lower interest rate.
- Home Equity Line of Credit (HELOC): This credit line involves a mortgage. Here, the approved limit depends on the market value of the borrower’s house.
Be it for business expansion, R&D or salary payment, this last-mile credit option offers access to timely and flexible funding.
Is a Line of Credit a Loan?
Both loans and credit lines in India provide the borrower with monetary aid at times of crisis. In terms of the end goal, they are similar. However, they are different when it comes to the working principle.
|Parameter||Line of Credit||Loans|
|Access to funds||Borrowers can avail what they need while staying within the set limit.||Borrower gets access to a one-time lump sum amount.|
|Tenure||It is a revolving loan, and you can choose your repayment tenure.||The loan is offered for a certain tenure.|
|Interest||Interest is levied only on the borrowed sum.||Fixed rate of interest throughout the tenure.|
|Repayment||Only the borrowed amount has to be repaid back along with the interest.||Loan has to be repaid in its entirety along with the interest.|
|Disbursal||Easy disbursal in 24-48 hours.||Time-consuming application process that involves multiple stages for verification and approval.|
It is quite clear that, unlike traditional loans, the various types of lines of credit allow businesses to borrow money on an ongoing basis. By being easily accessible, it reduces the financial burden on small businesses and start-ups significantly.
How Can Razorpay Credit Line Benefit Small Businesses?
- Attractive Interest Rates
Line of credit interest rates are lower than most traditional loans and credit cards. Moreover, you can save on interest by repaying early. Also, you pay interest only on the amount withdrawn.
- No Hidden Charges
No processing fees or pre-closure charges. Borrowers can repay before the due date without incurring any penalty. Borrowers only pay interest on the amount they utilize. Fair and square.
- Easy and Transparent:
Instant withdrawal and repayment of line of credit online, supported through a simplified app interface. Borrowers can apply from the comforts of their home with a 3-step application process.
- Collateral Free
Get access to up to Rs. 25 lakh credit line, sanctioned within 24 hours. No collateral required.
A business credit line is a highly desirable financial tool for modern entrepreneurs to get immediate access to funds. Seizing opportunities and growing a business is a continuous process, and small businesses and start-ups always have some upfront expenses that need to be taken care of.
With a customised line of credit, small businesses can address and mitigate sudden short-term financial needs. New-age entrepreneurs need new-age funding solutions, and now it is possible in three simple steps – Use, Repay and Repeat, with Razorpay.
Frequently Asked Questions
- What is the meaning of line of credit?
From a business perspective, a line of credit (LOC) is a flexible credit arrangement that provides access to funds up to a set limit. It allows a business to borrow, repay, and re-borrow within that limit as needed. Interest is charged only on the amount borrowed, making it a cost-effective financing option for managing cash flow and short-term expenses.
- What are the documents required to get a credit line?
The documents that individuals and businesses need to furnish to apply for a credit line are:
- Last three-six months’ bank statement
- KYC documents of major shareholders
- Business KYC documents
- What are the eligibility criteria to avail a Razorpay business line of credit?
Businesses that have been operating for at least 12 months and have an annual turnover of at least Rs. 20 lakhs are eligible to apply for Razorpay Line of Credit.
- How is the interest calculated on Razorpay credit line?
With Razorpay Line of Credit, the interest is charged on a daily interest model. This means that irrespective of the due date, interest will only be charged for the days you borrow the money. For example, if you repay and pre-close a loan just after 7 days of availing it, you will only have to pay 7-day interest.