What is a Business Line of Credit and How does it work?

A Line of Credit (LOC) is a godsend for businesses that require access to capital at regular intervals. It’s a popular credit product offered to businesses, startups and self-employed professionals. What makes the line of credit unique is that the borrower need not utilise the entire approved loan amount in one-shot. Think of it like a credit card. Once the line of credit is approved, the borrower can withdraw small amounts of funds from it as and when needed.

The biggest advantage of a line of credit is that the borrower pays interest only on the amount withdrawn, and not on the entire approved amount. Let’s say, a business has taken a line of credit for Rs. 10 lakhs. But, they use only Rs. 2 lakhs from it. Then, the borrower has to pay interest only on the utilised amount of Rs. 2 lakhs and not for the entire Rs. 10 lakhs. Compare this with a traditional business loan. If you take a business term loan of Rs. 10 lakhs then you have to pay interest on the whole amount.

Another huge benefit of a business line of credit is that it provides business owners with access to capital at all times. Instead of applying for separate term loans everytime they require working capital, business owners can dip into the approved line of credit as and when needed.

Thus, the business line of credit is a valuable financial tool for businesses of all sizes. Having access to a credit line helps business owners take advantage of the various opportunities that come their way, without waiting to apply for a new loan. It can help business owners and entrepreneurs grow and build a thriving company.