A business line of a credit scheme is a flexible revolving loan that commercial banks and institutional lenders offer to small companies. Under the lending facility, the corporations can access a specific sum of money whenever their businesses face a short-term cash crunch. The companies can then use the cash funds under the scheme to pay for unforeseen operating expenses, inventory, or equipment repairs. Once the corporate enterprises have overcome the cash flow issue, they can repay their financiers immediately or within a pre-determined period.
Kavan Choksi is a businessman with avid interest in photography and finance. According to him, small companies need access to adequate monetary funds to ensure the smooth running of their business operations. Many of them even need the money to finance their upcoming expansion projects. However, even the most lucrative of these corporations often experience serious short-term cash flow problems resulting from:
- Slow-paying customers who repay their outstanding debts even after their invoices’ due date,
- A periodic slump in sales revenue during an off-season,
- Urgent operating expenses that the companies need to pay off but did not anticipate earlier, and
- Sudden breakdown of vital machinery and equipment that needs urgent repairs.
A business line of credit from a reliable institutional lender can save the company from bankruptcy in the above situations.
How does a business line of credit work?
To open a business line of credit, small companies need to visit an institutional lender who is willing to offer them the lending facility. The financier will ask them to submit certain documents that prove their businesses’ creditworthiness, revenue-generating ability, and market reputation. These include their business licenses, previous tax returns, business bank account numbers, and bank statements for the last three months. Moreover, the companies will provide copies of financial statements for the last couple of years. These documents include the balance sheets, income, cash flow, accounts receivable, and payable statements. The financier will scrutinize documents and sanction the companies’ business line of credit application only if it is feasible.
The lender will then initiate a specific sum of money that the corporations can access in times of financial difficulties. Every month, the companies will receive an up-to-date financial statement from the lender informing them of:
- The amount of funds they have taken out to tide over a shortage of cash funds in the businesses, and
- The interest is chargeable on these loan funds.
The companies then have to repay these outstanding dues immediately or within a specific payment period to the lender. On receiving the payment from the corporations, the financier re-initiates their credit limit to avail further loan funds.
According to Kavan Choksi, a business line of a credit scheme is an ideal lending facility for small business to overcome their cash flow issues. They need to consider certain factors at the time of applying for the flexible revolving loan. The financier offering them the loan scheme should have a good reputation and adequate industry-based experience. Moreover, the terms and various conditions of the business line of credit scheme should be reasonable and acceptable to the companies.