Line of Credit:

Line of credit (LOC) loans can help serve as a valuable financing tool for business enterprises to meet their day-to-day working capital needs as well as fulfil other financial obligations. Such a facility allows businesses to apply and qualify for borrowed capital without much hassle. It is one of the simplest ways to fuel business growth and fund other revenue-generating projects.

Most lending institutions look for at least a few years of the business’ payment history prior to sanctioning a LOC. If eligible, lenders provide you with a fixed amount of credit, you can utilise as per your requirement for transitory business needs. The process of availing these loans is now much easier with the recent emergence of a number of fintech platforms.

Before opting for a business line of credit loan, read on to know about the different types of LOCs to make an informed decision.

What Are Line of Credit Loans?

Line of credit is a flexible loan facility, wherein lending institutions offer a defined limit of credit that one can access as per his/her requirements. Borrowers can either repay the used amount immediately or over a predetermined tenure. For the latter, the interest accrues on the used credit on a day-to-day basis. Also, borrowers must be careful of not exceeding the amount of credit limit set in the agreement and make timely repayments to avoid excessive interest.

LOC loans are low-risk revenue sources defined by the following features:

  • It is not economical for borrowers to take a loan, repay it and borrow again. This is particularly difficult for businesses that face a frequent cash crunch. Line of credit loans are thus an ideal option for businesses as they can avail a specified amount of credit accessible as and when required.
  • Lending institutions also might hesitate in underwriting one-time unsecured loans. Again, a line of credit is a suitable route for them as well.

So, while traditional loans are preferable in the case of a lump sum requirement, LOCs are suitable to meet short-term financial requirements due to their flexibility.

Types of LOC:

Lines of credits are broadly classified into secured and unsecured types.

  • Unsecured LOC: 

Most LOCs are unsecured as a borrower does not have to pledge any collateral to back it. Such credit products usually have a lower credit limit and a high interest rate. It is a suitable funding option for individuals unable to meet short-term financial requirements.

  • Secured LOC: 

In this case, borrowers receive funds from a lending institution against collateral. Secured LOCs are attractive working capital sources for businesses. These come with a higher limit and significantly lower interest rates. 

Some examples of line of credit loans are:

  1. Personal LOC
  2. Home equity LOC
  3. Demand LOC
  4. Securities-backed LOC
  5. Business LOC

How Does a Business Line of Credit Work?

Financial institutions while extending a business line of credit, first evaluate the business’s market value, profitability, and market risk before determining the maximum credit value. Depending on the requirement, businesses can seek unsecured or secured LOCs. 

A business line of credit works differently than a term loan. In case of a term loan, borrowers receive one-time lump sum credit that they need to repay over a pre-set repayment tenure. Whereas, with a business line of credit, borrowers can continue using and paying back credit as long as they don’t exceed the credit limit. 

Hence, if you are a business owner aiming for expansion or are unable to ensure smooth business operations due to a working capital limitation, a business line of credit can be of immense help. With such a facility, one can use the allotted credit as per custom requirement and accomplish funding needs like:

  1. Buying inventory
  2. Financing an essential marketing campaign
  3. Making up for transitory cash flow gaps
  4. Repairing equipment and accessories critical to a business’s operation
  5. Meeting cash expenses while waiting for clients to make payments on the goods and services sold

How is Repayment Done in Line of Credit Loans?

Most lending institutions allow borrowers to repay the withdrawn funds early so that they accrue less interest. Borrowers can also request or qualify for a certain limit, but they do not have to utilise it completely. One can tailor his/her LOC’s use as per the requirement, thereby paying interest on the amount withdrawn until repayment. 

The borrower is not mandated to repay the balance within a particular date, unlike term loans. Borrowers can thus either repay the outstanding balance all at once or in the form of minimum monthly payments. However, one must pay the interest accrued within the pre-set date. 

If you make repayments during the withdrawal period, a portion of the repaid amount will go towards the interest component while the other portion would represent the principal and will be added back to the credit line.

Borrowers can also opt for invoice discounting services, wherein the lending institution provides funds against a certain percentage of the unpaid invoices.

KredX offers invoice discounting service to businesses though a simple on-boarding process, following which you can receive funds against unpaid invoices within 24-72 hours*. This hassle-free digital lending is entirely transparent and provides you with healthy cash flow as per the value of your invoices.

The following section discusses the differences between a business line of credit and invoice discounting services.

Bill Discounting vs Business Line Of Credit:

  • Eligibility Criteria: Borrowers must satisfy a set of stringent eligibility criteria to avail a line of credit. And, in some cases, such as under a secured business line of credit, they need to pledge a valuable company asset as collateral. Contrarily, the eligibility criteria for invoice discounting are less stringent, and you can gain access to the necessary working capital instantly.  KredX, a leading provider of invoice discounting services, sanctions cash advances against unpaid invoices within 24-72 hours*.

Sign Up Now to Check your Eligibility for Bill Discounting Services

    • Credit limit: In the case of line of credit, the credit limit is determined by several factors like one’s requirement of cash advances, available cash flow, and assets.

    On the other hand, invoice discounting depends on the amount of receivable accounts from a business’s creditworthy clients and its ability to collect the debts. 

    • Maintenance: It is rather difficult to maintain a strict credit line as most LOCs are associated with specific covenants or rules that a business must comply with to keep the credit line in place.

    As opposed to a line of credit, KredX does not possess such covenants with loans sanctioned against unpaid invoices. All a business needs to do is collect timely payments from the clients against the raised invoices.

    • Increase in credit line: With LOCs as a business’s cash flow and assets must justify the credit line extension. However, with invoice discounting it is relatively easier to increase the credit line. One needs to provide information to the lending institution regarding his/her business’s anticipated customers and expected volume to avail financing. Your chances of increasing the credit line are significant as long as your account is in good standing. 

    The above-mentioned information about LOCs and how they work will help you to make the right financing choice that fulfils your  business’s working capital needs. Opting for KredX’s invoice discounting solution can further be quick, transparent and entirely hassle-free.

    FAQs on Line of Credit:

    A. LOCs are ideal for business owners involved in manufacturing, trading, retailing, etc. as such segments are in a continuous need of adequate working capital. Apart from that, travel agents, hotels, and e-commerce business owners are also eligible for customised LOCs.