Seeing your ideas take shape is one of the best parts of becoming an entrepreneur. However to make such dreams a reality, what you need is adequate funds. As a small business, you need to pay the lease for your office space, the rented storage space, and even utility bills which keep piling up.
In addition to these expenses you also need to keep the business running with some working capital. All these needs can be fulfilled with the help of a line of credit. What is that? Let us find out what a business line of credit is and how it can help you run your small business with ease!
What is a Line of Credit?
A Line Of Credit (LOC) is a pre-determined amount of money you can borrow whenever required and repay at your convenience. The facility is a one-time financial solution and can help you meet any urgent requirements and act as an emergency fund for your small business.
Furthermore, if you opt for a revolving line of credit, you can use the credit limit and repay the amount over and over again. This type of credit solves a critical pain point for small businesses, which is to maintain a consistent cash flow and meet short-term working capital requirements.
Advantages of Getting a Line of Credit
Usually, when starting a business or when in the initial stages of running it, entrepreneurs tend to opt for peer-to-peer lending. While this allows you to momentarily save some money and meet your requirements quickly, it has its own set of limitations in case of flexibility and security. On the other hand, opting for a LOC gives you the freedom to use the pre-set amount flexibly and repay it on your terms.
The interest rate charged on LOCs is lower than those of traditional business loans. You are also offered comparatively higher amounts when getting a LOC rather than a loan. In addition to this, the entrepreneur is liable to pay interest only on the amount utilised from the credit limit sanctioned. For example, if you are sanctioned a line of credit worth ₹5 Lakhs and you use just ₹3 Lakhs, the interest will be charged only on the ₹3 Lakhs spent.
How to Apply for a Line of Credit
Here are some steps to follow for a seamless Line of Credit application process
- Visit the branch office of the chosen lender
- Fill in the application with the required information
- Submit all the documents, as requested by the lender
Following this, the lender will check your credit score to analyse your creditworthiness and verify your documents. If you are found eligible, you will be granted the LOC.
Documents Required to Apply For a Line of Credit
When applying for any form of credit, besides some form of peer-to-peer lending, it is essential to keep some important documents handy. Here is a list of some documents you may be asked to submit when applying for a business line of credit.
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Personal Documents
- Identity Proof
- Your resume to build the lender’s confidence
- Bank statements
- ITR filings
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Business Documents
- Business plan
- Business Proof
- Employer ID Number (EIN)
- Business Vintage – Minimum requirement ranges from 6 months to 2 years
- ITR, Profit and Loss Statements, and Bank Statements
- Information regarding any other LOC or business loan
In case the line of credit you are applying for falls under the secured category, you would be asked for documents concerning the asset submitted as collateral.
How Can a Line of Credit Support Your Business?
Let us now understand the various ways in which a LOC can help grow your business and help you succeed.
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Marketing
With the help of a LOC, you can invest in marketing your small business and gradually grow your customer base. You can invest in paid advertising, campaigns, and other forms of marketing which will help customers find your small business and benefit from the services you have to offer.
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Payroll
Make sure to keep the hands that are constantly on your deck happy. Your employees are working hard to make your dreams come true. You can utilise the line of credit to make sure that you fill in the gaps in your finance and pay your employees well even during slow seasons.
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Equipment
When running a business of your own, along with manpower what is important is the machinery. This is especially important if you are running a manufacturing firm or an IT firm where your machines and gadgets are extremely important. You can use the LOC to get all the expensive equipment you need to run your business smoothly.
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Boost Inventory
When running a business, keeping your inventory stocked is important. You do not want to limit the growth of your business just because you could not stock up and deliver. Increasing the size of your inventory and renting a big enough storage space is possible with the help of a LOC.
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Consolidate Debts
As an entrepreneur, you realise that establishing your own business is not easy. It requires continuous efforts, hard work, persistence, perseverance, and of course, a lot of investment. When setting up your business, you too may have taken a few different loans to finance your business. You can consolidate these debts with the help of a line of credit and save extensively on interest payments.
Running a business of your own is no small feat. Make sure to get the required support with a line of credit and grow your business successfully. Prior to applying for a LOC, make sure that your credit score is up to the mark. This is important as it is one of the most crucial factors considered when determining your eligibility to get a LOC. Once you have received it, use it to boost your business!
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