How To Obtain A Strong Credit Line For Your Business

November 21, 2019

Where to get money urgently? Business owners frequently face this issue, and very often the success of the business depends on the promptness of its solution. However, all known methods like an overdraft, credit line with a bank and a loan from relatives are not always suitable, and each option has its price. But, there is a product with endless possibilities.

A business credit line is a convenient way to finance a small and medium business within a certain amount. It is issued and repaid in installments. An important aspect is that it allows the entrepreneur to spend the minimum of time working with the bank. Progressive loan products allow the customer to decide and take money when it is needed. And a credit line is one of such banking instruments.

How Does Line of Credit Work?

A credit line is a banking product for clients with active business, the stable development of which depends on the maximum involvement of working capital in the business. 

Depending on the operating cycles and production needs of the company, lending is offered in the form of renewable, non-renewable, multicurrency lines of credit:

  • revolving credit line. In this case, it is possible to repay the loan at any time during the whole term of the loan agreement. With the repayment of part of the loan, the credit limit restores. 
  • non-revolving credit line. This type of business financing is provided through the issuance of tranches within the established credit line limit. After repayment of a credit line tranche or part of a credit line limit is not renewed.
  • multicurrency line of credit. It is used for payments in both national and foreign currencies within the same credit line.

How to Get Business Line of Credit?

To open a business line of credit, you need to contact the bank whose financial products you use. The amount, rate and terms of crediting for each client are determined individually and are specified in the loan agreement.

The opening of a credit line is carried out by the bank based on the analysis of the client’s financial condition, the feasibility study of the use, and repayment of the loan, as well as the assessment of the collateral. The bank’s employees develop the optimal loan repayment schedule and scheme of its use, taking into account the client’s cash flows and the influence of external and internal factors.

There are two important notions for a business credit lime. They are debt limit and issuance limit. A line with a credit limit means that a loan repayment does not renew the credit limit, which is not always convenient for business owners who need frequent loans. But a credit line with a limit of issuance allows several stages of loans.

A credit line with a debt limit means that only the amount of the debt is limited. That is, if you have used some funds and then repaid them, the credit limit will restore.

Benefits of Credit Line

  • It is a unique opportunity for the client to manage their financial flows independently;
  • It enables the client to repeatedly select and repay loans during the term of the loan agreement, within the established credit limit;
  • A credit line is provided at any time;
  • For the active user of the credit line (timely repayments) the total cost may be cheaper than the regular credit;
  • The lender offers a flexible integrated approach to collateral, sometimes assets can be considered as collateral within the credit line;
  • The user can get the possibility of establishing an individual repayment schedule for each issued tranche, taking into account the specific nature of the business and the features of the credited project.
  • The rate is fixed for the entire crediting period.
  • Interest fee is calculated only for the period of the actual use of the loan.
  • One-time commission is paid upon conclusion of the contract.

The disadvantages of a credit line include:

  • It can be obtained only in the financial institutions where the client has a deposit or a valid account;
  • The credit limit amount depends on the income of the client (if the income decreases, then the credit limit reduces as well);
  • The crediting period is usually for a short term rarely exceeding 12 months.

The credit line is a great advantage for small and medium business owners as they save a lot of precious time when they are in a desperate need of money. But at the same time, it is a big temptation to overuse the credit funds which may result in failure to repay it in time.

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