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Tata Capital > Blog > Loan for Business > How Does a Short-Term Line of Credit Work?

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How Does a Short-Term Line of Credit Work?

How Does a Short-Term Line of Credit Work?

Running a business is no small feat! As a small business owner, you have to face countless challenges and overcome several rainy days to stay afloat. This also means you need to be prepared for unexpected expenses, financial losses, and cash disruptions.

Well, if you're in the same boat, a short-term line of credit might be best suited to your financial needs.

What is a short-term credit line?

First, let’s understand what a line of credit is.

A line of credit is a flexible finance option where you can borrow a particular amount from a lender; however, you're not obliged to take the entire amount in one go. In other words, you can take a small amount from the whole fund for your immediate needs and keep the rest with your lender.

Further, a short-term credit line is available for only an intermediate-term between six months to one year. Unlike a traditional business loan, you don't get access to the entire loan amount at once. Instead, you can dip into a pool of money as and when needed while repaying interest on only the amount used.

A line of credit operates more like a credit card and can help you quickly get your hands on capital during a cash squeeze.

Additional Read: What is a Business Line of Credit & How Does it Work?

How does it work?

Suppose you have some short-term working capital needs like inventory purchases, equipment repairs, and payroll. Or, you need to make a strategic business investment like a marketing campaign. You borrow Rs. 50,000 using the short-term credit line and only take out Rs. 30,000.

Now, you only have to pay interest on the amount you have withdrawn and not the entire sum. As a result, you will not be burdened with a heavy EMI amount. As you can see, a short-term credit line works like a credit card where you only pay the charges for the funds you use and not the entire credit limit. You can also enjoy competitive business loan interest rates on a short-term credit line.

Advantages of a short-term credit line

  • Fast processing: If you need funds urgently and can’t afford heavy paperwork, a short line of credit can be perfect for you. You can enjoy fast processing and quick disbursal of credit through this finance option.
  • More control on usage: You can make use of these funds as you deem fit! There's no restriction from the lender, which makes this method ideal for things you can’t get traditional loans for.
  • Easy eligibility: If your business is relatively new and lacks a well-established credit history, a short line of credit can be your saviour. Lenders usually have lenient business loan eligibility criteria for extending short-term credit lines.

Additional Read: Top 7 Ways to Build Business Credit

Bottom line

When financial contingencies crop up, access to immediate funds can be of significant help. At Tata Capital, we understand what it takes to keep a business standing. That's why we offer custom business finance schemes to meet your varied requirements.

You can also use our business loan EMI calculator to get a fair idea of your projected monthly EMIs should you apply with us. So, connect today!

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