The business line of credit in India is a type of business loan. This loan works on the principle of a credit card. In the Business line of credit, a borrower needs to pay the interest of the withdrawn amount rather than the complete approved loan amount.
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Business Line of Credit Explained
Every new business and start-up needs sufficient funds for business operation, inventory, and other business-related expenses. To maintain all these expenses, one needs to borrow money from a bank in form of a loan. In the traditional business loan, one needs to pay interest on the whole sanctioned amount irrespective of business growth or downfall. In the case of business failure, it becomes risky and difficult to clear the debt of the bank.
The line of Credit in India is a type of business loan. It works on the working principle of the credit card. The business line of credit is flexible in nature, by using this flexibility borrowers can request a certain amount of money from the bank. Once the borrowed amount is sanctioned by the bank, borrower can use the small portion of sanctioned amount instead of using the whole amount and the bank will charge interest only on the used amount rather than complete sanctioned amount. This makes business line of credit a favourable business loan in India.
Business Line of Credit Types
Line of credit is divided into two different categories secured business line of credit and unsecured lines of credit. Details of different LOC categories are mentioned below.
- Secured Business Line of Credit: As we know that line of credit is a short term credit option. In secured line of credit lender can ask borrower to keep financial assets like fixed deposits, mutual funds etc as a collateral against the sanctioned line of credit. If the borrower fails to pay the debts and dues on time, then the lender had the right to liquidate all the assets of borrower to cover the unpaid amount and dues.
- Unsecured Line of Credit: Under the unsecured line of credit, borrower doesn’t need to keep any kind of assets as collateral against the sanctioned line of credit. Balance sheet health, financial statement, revenue statement, and cash flow of business will became the guarantee of line of credit for business
Business Line of Credit in India Benefits
Business line of credit is a favourable type of business loan in India. Due to its flexible nature, it becomes popular in new business start up. Here we are sharing benefits of line of credit in India.
- Quick and Hassle-Free Access to Cash
Business LOC offer hassle free and quick access to cash. Borrower can use desired amount from the total sanctioned amount anytime
- Paying Interest Only on Used Amount
If you are using business LOC then you need to pay the interest only on used amount rather than the complete sanctioned amount. For example if your approved line of credit is of Rs15 lakh and you used only Rs 5 lakhs for your business expenses, at the time of repayment, you only need to pay interest on used 5 lakh rupees rather than complete 15 lakh rupees.
- Easy Covering of Unexpected Expenses
Line of credit allows you to cover your unexpected business expenses easily because you already have pre approved funds in your account.
- Lower Interest Rates
Interest rates offered on LOC are lower as compared to traditional business loans. One can grow his/her business without paying extra interest rates using LOC.
- Dedicated Credit to Cover Business Expenses
Line of credit is a business dedicated credit. With the help of this LOC, one can keep track of their business expenses; make business related payments on time. It is a easy hassle-free short term solution for covering all expenses like new hiring, office renovation, marketing, promotion and purchasing inventory.
- LOC Comes Between Credit Card and Business Loan
Line of Credit (LOC) comes in between credit card and business loan. For example if you want to renovate your office but the expense of renovating is higher than your credit card limit but lower than taking a loan. In this situation line of credit at as a sigh of relief because you already have approved amount it in your account. All you need to do is to use this amount to cover your expense and at the time of repayment you need to pay the interest only on withdrawn amount
Line of Credit Disadvantages
Business LOC also comes with disadvantages. We are sharing details of disadvantages of Line of credit.
- Complicated Process of Application
Application process of LOC is very complicated. Approved LOC requires various documents and statements like business revenue statements, income tax returns, tax statements, company financial reports, your credit and cibil score etc. It takes too much time and effort to collect all these documents at a single shot.
- Missed Payment can Lead to Higher Interest Rate
In case you missed to pay your line of credit (LOC) debts on time, the lender will charge high interest rate on your borrowed amount. When you miss a payment, you will be forced to make larger and larger payments in the future.
- High Withdrawal and Maintenance Fee
Line of credit comes with different fees and charges. You need to pay handsome amount of money while withdrawing money from your LOC. Maintenance fee for LOC account are also on higher side.
Business Line of Credit Important Documents
In order to apply for Business LOC, you need to keep the below mention documents ready
- Passport size photo
- Pan Card
- Electricity Bill or Passport for Address Proof
- Mobile Number
- Bank Statement
- GST Statement
- Income Tax Returns Statement
- Business Revenue Statement
- Company/Business Financial Report
- Balance Sheet of the Company/Business
Business Line of Credit Eligibility Criteria/Requirements
Once you secure the important documents for the application, the other step is to check requirements or eligibility criteria of lender. Requirements and eligibility criteria differs from lender to lender. Here we are sharing some basics requirement for successful application process.
- In the cases of the most lenders NGOs, Charitable Trusts, Charitable institutions are not eligible for the Line of Credit.
- Good credit score and capability of repayment is considered as good factor for LOC eligibility.
- Experience and tenure of business is a very important requirement for LOC
- Authentic business statements, valid and updated balance sheets, and other business related certificates are also needed.
- Profitability of business, good financial history, and constant income makes your business trust-worthy for the lender.
- A good cibil and credit score with complete documentation of business is needed as the eligibility factor for LOC.
Business Line of Credit Application Process
Once you complete the documents and requirements of lender, then you need to apply for your business line of credit. Applying for Line of Credit is very simple and hassle-free. Interest applicant can apply for Line of credit via online mode by visiting official website of the lender bank. They can also apply offline by visiting the nearest branch of the bank/Office. All the business details and documents will be verified by the bank or the representative of bank and when the bank get satisfied by your documents and information, it issue the credit line into your account