When it comes to running smooth business operations, funds are instrumental. However, seasonal slumps, delayed payments, and unexpected expenses can constrict your cash flow. In such circumstances, a line of credit or LOC can get you the working capital you need.
With a business LOC, you can fund urgent expenses and have a steady stream of credit, which you can borrow from any time you like. A business line of credit for new businessesis also helpful if you’re starting your venture and are unsure what kind of costs you will incur.
Before we evaluate whether a line of credit is right for your business, let’s look at how it works and its types.
What is a line of credit for businesses?
A business line of credit(LOC) works in the same way a loan does. You approach a lender, get the credit approved, and use the funds for business operations. However, there’s one key difference. The amount is disbursed as per your needs.
This means you can use the sanctioned amount in parts. Also, the lender will charge you interest only on the amount you withdrew and not the entire principal. And you only repay the amount you utilise.
Here, the lender does not designate a specific purpose or purchase for the credit, which means you can use the funds to manage cash flow better, cover intermittent expenses, or tend to your organisation’s short-term expenditure.
Additional Read: What is a Business Line of Credit & How Does it Work?
Types of lines of credit for businesses
Business LOCs are broadly classified into two types:
- Secured: For this LOC, you need to pledge one of your assets as collateral while applying for credit. The lender will hold the collateral until you repay the loan for security. However, in exchange for security, you can qualify for relatively lower business loan interest rates.
- Unsecured: Unsecured LOC doesn’t require you to offer collateral as a security.
Is a business LOC right for your business?
Business LOCs are an excellent choice for small businesses which can’t accurately predict their revenue and sales. Since you can borrow chunks from the sanctioned principal, you can request and use the amount as and when required. Business LOCs are also great if you’re looking to build up your credit score.
But it’s essential to keep in mind that these lines of credit usually have variable interest rates. This means, unlike loans, you cannot calculate the instalments and interest payable in advance. Also, untimely payments can ramp up the EMI size.
Here, you can choose a business loan if you have a specific purpose in mind, like purchasing equipment, cash flow management, financing inventory requirements, etc. Also, you can borrow a relatively higher amount with a loan and manage hefty expenses like business expansion or other long-term plans.
Additional Read: Business Loan VS Lines of Credit: Everything You Need to Know
In a nutshell, a line of credit has both pros and cons, and the right financing choice depends on the unique requirements of your business.
If you are looking for multi-purpose business finance, choose Tata Capital! We offer flexible tenures, customisable EMI plans, and attractive interest rates.
Check your business loan eligibilityand apply today.