Having adequate funds is key for any business to deliver as per customer expectations and remain competitive in the market. However, adverse market conditions can impact business cash flow and working capital requirements. In such a situation, you can consider availing a business line of credit.
A line of credit financing option helps to meet all your funds' shortfall and allows you to run the business with full potential. Let’s understand in detail, what is a line of credit.
A business line of credit (LOC) is a type of business loan that allows businesses to borrow up to a certain limit and pay interest only on the portion of the amount borrowed. It’s a type of revolving credit that works similar to credit cards. Usually, the loan is secured against financial assets such as stocks, mutual funds, fixed deposits, etc.
The maximum amount that can be borrowed under the line of credit financing option is determined by the lender based on the financial condition and cash flows of the business, as well as the value of pledged assets.
A line of credit option can be availed for meeting short term funding requirements like purchasing inventory, payment of wages, meeting the seasonal cash flow gap, funding marketing campaigns, etc.
Business LOCs are of two types, secured and unsecured business LOC.
Under the secured option, the business needs to pledge financial assets as collateral. Since LOCs are short term credit options, lenders may ask the borrower to pledge account receivables, financial assets such as mutual funds, fixed deposits, etc. as collateral. If the business fails to repay the availed LOC within the due date, the lender liquidates the collateral pledged to recover dues.
Whereas, in the unsecured option, the business doesn't need to provide any assets as collateral to avail the facility. The LOC facility is provided based on the business's cash flow situation and balance sheet health. In certain cases, the owner needs to provide personal guarantees to secure the business LOC financing option.
Business term loans are lump sum loan amounts provided to meet the small or long term business requirements. The loan amount availed of should be repaid in fixed monthly payments over a fixed tenure with interest. The interest is accrued on the entire loan amount.
A business term loan generally has a tenure of 5 years (or more, if it is secured against property), whereas, a loan withdrawn against a business line of credit must be repaid within 6 months to 3 years.
Business LOC is revolving credit and the interest is paid only on the amount availed as a loan, not on the entire limit sanctioned. Also, you get the flexibility to repay the amount as per the business’s cash flow, but the loan needs to be repaid within the due date as per terms and conditions.
The working of a business LOC is very similar to a credit card. Once approved by the lender, the line of credit amount is credited to a special account from where you can access the funds when needed.
A monthly statement is generated by the lender stating the amount of credit used and accrued interest rate amount. Once the amount is repaid in full, you can once again get access to the full credit limit approved by the lender. Fullerton India offers loans against securities that can work for you as a business line of credit. To know more, visit our page today.
If you wish to secure a higher amount, you can go for a term Business loan. Please check your eligibility and the maximum amount you may be able to get using our business loan eligibility calculator. You can also use business loan EMI calculator for planning the repayments for your business loan.
Business LOC not only provides the flexibility in meeting all your short term funding requirements, it also helps in improving business credit score, improving chances of loan application approval next time at attractive terms and conditions. However, this instrument is useful in meeting sudden, unexpected business expenses which can be easily repaid within a short time period. For other long term requirements, a business loan may be a better choice.