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A line of credit is a flexible loan that businesses can acquire from banks or financial institutions. These loans give business owners the ability to access funds when needed and repay over time.
You pay interest only on the portion of money borrowed for credit lines, irrespective of the sanctioned limit. This is unlike a traditional small business loan where you pay interest on the whole amount disbursed in a lump sum.
When you own a business, a line of credit can help you tackle several short-term funding requirements, such as maintaining inventory, salary payments or addressing new orders. Also, having access to a line of credit can help you control your cash flow throughout the year.
Benefits of a line of credit for businesses
There are several reasons why your business can benefit from a line of credit.
The most significant advantage of a line of credit is flexibility, which means you can access cash at frequent intervals, repay them and borrow repeatedly. A line of credit makes funds available whenever you need them, with a flexible repayment structure.
You can use a line of credit however and whenever you see fit: to cover gaps in cash flow, for ongoing operating costs or tackle unforeseen challenges.
To avail a line of credit, you do not always need collateral or a very high credit score. This makes a line of credit a solid alternative when you can’t get a traditional loan.
4. Business credit
By availing a line of credit, you can maintain a good credit score. However, make sure that you continue to make your payments on time and keep a low account balance, and you will likely see your credit score go up. Also, you have the advantage of boosting your businesses’ creditworthiness in the eyes of lenders.
5. Cash outflows
A line of credit comes in handy when there are frequent cash outflows, and it is difficult to determine the exact need for funds in advance.
6. Business growth
In this challenging and highly competitive environment, a business must adapt to dynamic business needs. A line of credit keeps your business cash flows smooth. It promotes growth by meeting the changing demands of the market and catering to unforeseen opportunities.
How does a line of credit differ from traditional business loans?
Traditional business loans provide funds in one shot at the time of obtaining the loan. Here, the interest is applicable on the whole amount of loan disbursed irrespective of the usage of such funds.
However, under a credit line, interest is applicable only on the borrowed amount and not the entire approved limit. So, you need to pay interest according to your business’s funding needs.
Another parameter for the difference is, loan structure and repayment terms!
Business loans are borrowed for a specific term, say three or four years – or even longer, in some cases. They are repaid in equal monthly instalments – consisting of principal and interest for the entire tenure of the loan.
Line of credit works differently. In this case, the lender provides a credit limit to the borrower and allows him to utilise the limit for a predetermined length of period. Like a credit card, the borrower can use the amount for making purchases and repay them after a particular period. And, then again use the credit limit over and over again to make other purchases or payments. This provides long-term flexibility to businesses as compared to a loan.
Line of credit vs. credit card
With many features in common, both line of credit and credit cards offer a credit limit that can be borrowed or utilised whenever needed.
Credit cards are one of the most prevalent credit sources among small business owners and start-up founders. Apart from their popularity, they are also easy to access. However, the limit offered by a credit card is comparatively lower than a credit line.
Also, the interest rates charged in the case of credit cards are much higher than those of credit lines.
Furthermore, a credit card allows you to spend first and pay after a predetermined grace period. In a credit line, you obtain funds required from the lender, utilize them, and repay them later.
Things to consider while using a line of credit
Here are the key things to keep in mind when you opt for credit lines.
- It is best to use credit lines with long-term loans. This way, both your short-term and long-term financial requirements will be met
- You must always pay the debt on time to maintain a good credit history
- Do not excessively rely on credit lines as it may land you in trouble of getting overburdened with debt
Financial products work wonders if handled wisely. Likewise, credit lines can turn out to be a boon for your business if used appropriately.
While opting for a credit line, keep your business vision in mind. Carefully examine the long-term goals, review the current financial situation of your business and understand both short-term and long-term requirements.
Implement a good combination of credit lines with long-term loans, and you can see your business reaching great heights!
Razorpay Cash Advance
Razorpay Cash Advance provides a line of credit to SMEs that suffer unplanned cash requirements quite often.
Here are the benefits that you will receive from Cash Advance:
- Withdraw instantly in seconds without a fresh application every time
- Get your expected revenue in advance and choose a day to repay from a future settlement
- Pay interest only on the amount withdrawn and number of days used
- Pay zero processing fee and annual fee
Don’t run out of cash and don’t stop growing!