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

Every business, whether big or small, requires funds for smooth operations. But often, there are challenges like delayed payments, seasonal slumps, work shortages, etc., that can severely affect your cash flow. In such a situation, a business line of credit can help you tackle these situations with confidence.

It can provide you with essential resources to fill your short-term financial necessities while ensuring a steady stream of working capital.

So, what is a business line of credit, and how does it work? Let’s find out.

All you need to know about business credit

A business line of credit(LOC) is a kind of business financing that offers a predetermined amount of capital. It is a revolving loan that allows you to use funds up to a specified limit as and when you need them. Thanks to its flexibility, you use it to fund your revenue-generating projects and boost growth.

A business LOC can help you finance working capital requirements, such as funding a marketing campaign, purchasing inventory and equipment, hiring new employees, managing cash flow, expanding, repairing, paying for a sudden expense, etc.

Additional Read: Business Loan VS Lines of Credit: Everything You Need to Know

How does a business LOC work?

A business LOC works much like a credit card. When you open a LOC, you can borrow funds, use them, and repay the amount over time to replenish the credit limit. However, unlike a term business loan that provides you with a lump sum amount, a business LOC doesn’t need you to use all the loaned amount in one go.

You can keep drawing as much as you need and reuse the funds as long as you don’t exceed the credit limit. Besides, you only need to pay interest on the portion of money you borrow. A lender may also charge you an annual fee or transaction fee.

Types of business LOC

• Unsecured line of credit: A LOC that does not require you to provide specified assets as collateral.

• Secured line of credit:  A business LOC that needs you to pledge an asset as security is a secured LOC. Since it is a short-term liability, a lender usually asks for short-term assets such as equipment, vehicle, real estate, inventory, accounts receivable, etc.

• Revolving line of credit: With a revolving LOC, once you have repaid the debt, you can borrow a loan up to the credit limit once again.

• Non-revolving line of credit: It refers to a credit line that doesn’t replenish after repayments. You cannot use it again after paying off the loaned amount. Generally, businesses with lower credit scores get such LOC. Its credit limits are also typically lower.

Additional Read: Top 7 Ways to Build Business Credit

Wrapping up

For your small business, a line of credit is an ideal financing tool. If you’re looking to get funds for your company, turn to Tata Capital for a loan. With our business loan interest ratesstarting at just 19%, you can apply online and meet your business needs effortlessly.

With our simple documentation and high business loan eligibility, you can get funds ranging from Rs. 5 lakhs to Rs. 75 lakhs smoothly. Learn more here.