Business Line of Credit: Answering all your questions

When should I apply for a business line of credit?

As a small business owner, you should consider taking a business LOC if you are in constant need of funds to meet your short-term obligations.

For example, if you run a seasonal business where cash flow is irregular, then you can apply for a business LOC to fulfill the business requirements during the off-season. If you need to ensure timely payments to vendors to maintain the supply chain, then a business LOC is very useful. 

Secondly, you should have an established business credit profile and personal credit profile to be eligible to apply for a business LOC. Your business should also have an established revenue record to be eligible for a business line of credit.

How do I apply for a business line of credit?

Applying for a business line of credit is similar to applying for a business loan. Here are the steps you need to follow to apply for a business line of credit:

1. Review the credit score and financial performance of your business, as they are a major criteria for the approval of a business LOC application
2. Compare different lending options to know how well you qualify for various loan products
3. Check the eligibility criteria with different lenders
4. Compare the costs and other fees applicable to a business LOC facility with different lenders
5. Once you have finalised the lender, fill the application form and submit it along with the necessary documents

Is collateral required?

There are two types of business LOC – Secured LOC and Unsecured LOC.

A secured LOC requires collateral in the form of property mortgage, fixed deposits, life insurance policies etc. Whereas, in unsecured LOCs, the lender relies on the financial and credit history of the business and borrower to extend a business LOC facility. 

Am I eligible to apply for a business line of credit?

The eligibility criteria to apply for a business LOC variess from lender to lender. However, the primary eligibility criteria to apply for a business LOC are:

1. A good credit score of both the business and borrower
2. A stable financial history with profitable business operations
3. The business should be in operation for more than 3 months
4. The business should be legal in the eyes of the law 
5. The enterprise should not be a Trust, NGO, charitable institution or excluded from the list of eligible entities

Which documents are required to apply for a business line of credit?

Some of the common documents needed to apply for a business line of credit are:

1. Proof of business registration certificate (Partnership Deed, Certificate of Incorporation/ Article and Memorandum of Association, Trade license, GST registration certificate)
2. Proprietor's PAN Card, AADHAR Card, and valid address proof ( in case of a partnership, all partners should provide their identity proof)
3. Last 12 months business bank statement
4. Tax returns
5. Business financial statements including P&L statement, cash flow statement, balance sheet etc.

What happens after I apply for a business line of credit?

After applying for a business LOC, the lender scrutinises the application and determines the credit line amount, interest rate, and terms based on the business financials and credit profile.

The terms include minimum payment due each month, annual charges and fees, late fees, tenure of repayment etc.

Following the evaluation and finalisation of the terms of the business LOC, sign the documents as required by the lender. The funds will be made available to your account, which can be accessed via online bank transfer or cheque. 

How much interest will I have to pay?

The interest rates are based on your business's credit profile, soundness of financial statements and repayment capacity. Generally, the rates are comparatively lower than traditional unsecured sources of finance.

The interest rate on a business line of credit generally ranges from 10 per cent to 15 per cent annually.

How do I request an increase in credit line?

Before requesting an increase in the credit line, ensure that you have a favourable history of repayments and credit line utilisation. Here are some tips to increase your business line of credit:

1. Have justifiable reasons before placing a request for an increase, like higher order volume or large contracts
2. Have up to date financials to show tight cash positions. The business needs to show viability and strong fundamentals through financials and business history
3. Consider offering additional collateral to get a higher line of credit and lower the risk financial institutions take when they extend higher limits on the credit line

There is a diverse range of requirements that every entrepreneur needs to fulfill to run a business operation successfully. To accomplish this, the business needs to have financial flexibility without which it can lose the competitive edge. 

A business line of credit helps businesses achieve the desired growth, provides the required flexibility and facilitates smooth operation. A business line of credit is the best way to meet short-term capital requirements and fund other initiatives towards the expansion of your business.