Any enterprise, irrespective of the scale at which it operates, requires credit at one point or another. To meet the varying types and degrees of demand for credit, banks and other financial institutions offer a slew of options to businesses. Of these, one option that companies resort to extensively, is a line of credit.
There are several types of LOC that businesses can access to mitigate an array of expenditures. By learning about these various types, business owners can optimise their utilisation of the same, allowing them to derive more value. However, it’s first necessary to gain an elementary understanding of the umbrella term - line of credit.
Essentially it’s an arrangement between a financial institution and an entity, like a business, where the latter can borrow money any time it wants up to a specified limit - called the credit limit.
It provides businesses with utmost flexibility when it comes to accessing funds, since there’s already a limit available to them. However, the interest such utilised amount attracts is usually higher than traditional forms of credit.
Thus, alternatively, businesses can consider options like invoice discounting that allows companies to leverage accounts receivables, to avail a cash advance. With KredX, companies can acquire funds through bill discounting within 24 – 72 hours*.
The line of credit facility can be broadly categorised into –
Unsecured LOCs are the most typical variant, and as the name suggests, these lines of credit do not involve any collaterals. A corporate credit card is a primary example of an unsecured line of credit.
Since this type of LOC implies a substantial risk for a lender, they come with a high interest rate, with their limit on the moderate side. However, the extent of such a limit depends on the credibility of a borrower.
Since it’s unsecured, businesses need to possess a healthy credit score to qualify for such a line of credit. Companies with a low score cannot avail an unsecured LOC.
As opposed to the former type, borrowers need to collateralise an asset to avail a secured line of credit. In this case, the credit limit offered to a borrower depends on the value of such an asset. Hence, the limit offered can be quite generous.
From a lender’s perspective, this facility carries substantially low risk, and the same is reflected on their interest rate. It is also easier to qualify for a secured line of credit because of the same.
Both businesses and individuals can access this type of LOC. But, as the name indicates, such a line of credit can be revoked by the lender at its discretion. Several circumstances can warrant such an action, like a significant drop in a borrower’s credibility or severely adverse market conditions.
Usually, all lines of credit are revolving. It means a person can borrow, repay, and again borrow in a revolving fashion. This way, businesses can flexibly meet a variety of expenses, without applying for credit every time.
This term usually refers to traditional loans. In this case, borrowers avail a fixed sum of money, and repay it through EMIs. However, unlike a revolving LOC, businesses cannot access more funds after repayment.
Alongside these lines of credit, it’s also wise to consider other types of facilities that businesses can avail. That’s because not every business requirement can be ideally addressed with a line of credit; this may require companies to turn to other viable options like invoice discounting service from KredX.
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