What is a Business Line of Credit?

MSME Loans

A business line of credit is a boon for small businesses that need access to funds at regular intervals. It is a type of unsecured loan and has a fixed interest rate for a short period. This financial tool helps businesses grow and expand their business operations. As one of the popular products offered, small businesses and self-employed professionals can benefit from it. What makes this loan different from others is that you don’t need to utilise the entire loan amount in a go. A business line of credit requires less documentation, is cheaper to obtain, has lower rates of interest, and is collateral-free compared to traditional business loans lent by banks. A business line of credit is a flexible financing option since it does not require collateral.

What are some features of a Business Line of Credit?
A business line of credit can be a useful tool for MSMEs and small businesses. It can benefit businesses in the following ways:

1. Flexibility
It offers flexibility to small business owners by helping them meet their current obligations, such as payroll, equipment purchases, and debt service..

2. Interest Rate
Businesses have the freedom to pay interest only on the amount utilised and not the total amount. This way, borrowers save a large amount by not paying interest on the unused loan amount. This further reduces the burden of paying off EMIs.

3. Higher Loan Amount
A line of credit is categorised under business loans, allowing MSMEs to avail of a higher loan amount as compared to other traditional loans.

4. No Hidden Charges
While availing of a business line of credit, there are no extra or hidden charges levied on the initial amount borrowed or the total sanctioned amount.

5. Collateral-free
These loans are collateral-free, making them a hassle-free solution to MSME financing problems.

How to Avail a Line of Credit?
It is easy for businesses and MSMEs to apply for a business line of credit. Most banks and NBFCs offer Lines of Credit for both personal and business use. A secured and unsecured loan, a line of credit is offered for people, business owners, and for connected commercial objectives. Interested applicants can apply online by visiting the bank's or NBFC's official website. After submitting the completed application form on the bank's website, the bank will evaluate the provided financial records and, if satisfied, will grant the credit line based on the customer's eligibility.

Understanding the Repayment Procedure of Business line of Credit
The repayment process of a business line of credit is similar to that of a credit card. A deadline will be set for the repayment once you have used your loan’s credit limit. Additionally, if you need to avail some more cash before the repayment of the first one, you can get that without any trouble.

How to track your Line of Credit (LOC)?
The monthly statement supplied by the lender allows you to simply track your LOC. Though the lender can give you the statement in a variety of ways, in this paperless banking era, financial institutions normally prefer to deliver e-statements to your registered email address. Always check your bill every month or quarterly, depending on whatever mode you chose, to maintain track of it. Check the remaining balance before applying for a new loan, as it is necessary to pay off any outstanding debts before applying for a new one.

Who Should Opt for a Line of Credit?
A line of credit is an excellent way for MSMEs to satisfy their financial obligations while paying a low-interest rate. However, to get the greatest benefit, every excellent thing must be used correctly. It is better to avoid a LOC if you are not financially disciplined or if you are unsure about your repayment capacity. LOC being similar to a credit card may be a boon for those who utilise it properly but can become a nightmare if used irresponsibly.

How can a Line of Credit Boost Your Business?
A small business is all about unpredictable dynamic conditions. There are times when these unexpected situations will leave you in a fix. As a result, for small enterprises that are prone to lose and emergencies, a LOC is the best option because the borrower has the option to withdraw funds as and when needed.

Estimating a final amount for a business in today's volatile industry is nearly impossible. There is a strong risk that you will run out of cash, and in that case, you will require immediate funds. When you apply for a business loan, you will be given a certain sum that you will most likely use up in a short time. However, if you choose a LOC, there is a good probability that the bank will grant a large loan to your business. Taking risks becomes easier and less stressful when you know you have a security guarantee. In business, no risk equals no benefit, and this is where a line of credit comes in handy.

Therefore, a business line of credit is a valuable tool for various businesses. With access to a credit line, businesses can now take advantage of the various benefits presented to them, without waiting to apply for a loan.

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