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Business Line of Credit: How It Works and Best Options

Small businesses need credit to grow and fulfill their working capital needs. While at times the requirement of credit is a one-time event like buying a machinery which will result in increased income, whereas at a lot of times the requirement is to cover for a short term arrangement or gap in earnings and spends which is essentially temporary in nature and may be because of off-season or to add new clients. The working capital requirement is essentially not something where businesses want to pay regular installments for, they want these to be connected with their transactions so they may pay back when they earn. These are essentially solved using an Unsecured Business Line of Credit. A Business Line of Credit is essentially a rotating amount of loan which can be availed and repaid as and when the business wants.

Here are some key elements which describe how the Business Line of Credit works.

It is a Rotating Loan Amount

If a business takes a line of credit then essentially, they get this amount sanctioned against them. However, the business does not gets this amount credited in their account. They are free to sue this amount in full or part whenever they need this money and they may repay as and when they want, fully or partially. The business essentially pays a small one time processing fee which varies for every lender and then they only pay the interest for the amount they use, if they do not consume any amount from this limit then they will not pay any interest amount. Thus, it is completely flexible for working capital loans and solves the temporary gap that small businesses often come across on a regular basis.

This entire rotating loan is very similar to a credit card which one uses for a personal purpose, if we do not use a credit card for a period then there is no need to pay any amount to the lender and similarly, the Business Line of Credit operates on the same principles.

Saves businesses from applying for frequent loans

Every loan application takes some time and effort on the part of small businesses, be it the paperwork or even sparing the time to think through all the requirements, amount needed and planning for repayments. However, the Business line of Credit which is used for working capital loans saves the business owners and stakeholders from this effort every time they have a short term requirement as once they have a Business Credit Limit sanctioned as a business loan against their name, they are free to use it for making payments as and when they want, there is no pressure of repaying EMIs or even using full or partial amount. This saves a lot of effort and time on the part of business to use the Business Line of Credit instead of applying for a business loan every time they have a requirement for a working capital loan.

Businesses pay only for what they use

Apart from the benefits mentioned above, a key and significant benefit of the Business Line of Credit is that one has to pay for only the amount they have consumed and only for the number of days they have used it for, which comes out to be significantly cheaper than the traditional business loans which have a fixed repayment amount and schedule. The working capital loans or the line of credit allows the small businesses to have this flexibility of availing this amount as per their requirement without having to go through the process of loan approvals or having to pay a fee every time one wants a working capital loan.

The Business Line of Credit is offered by both – the traditional lenders as well as the new age digital lenders. The traditional lenders depend more on the collateral to issue a business line of credit whereas the new age digital lenders like Indifi have unique business loans products for different business types and are completely unsecured without having any need to pledge the property papers. These unsecured working capital loans are basis for your business transactions and are a great blessing for small businesses to overcome their working capital requirements.

About RJ Frometa

Head Honcho, Editor in Chief and writer here on VENTS. I don't like walking on the beach, but I love playing the guitar and geeking out about music. I am also a movie maniac and 6 hours sleeper.

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