Business Lines of Credit
Commercial banks deal with corporate customers. The needs of the corporate customers are quite different as compared to the needs of the retail customer. Hence, the lending products which are offered to corporate customers are also quite different compared to the ones which are offered to retail customers.
Lines of credit are one such banking product that is offered to corporate customers in a different manner as compared to retail clients. In this article, we will have a look at what lines of credit are and how they help businesses meet their financing needs.
What is a Business Line of Credit?
The working capital needs of a business can be quite erratic. For instance, it is possible that a business may bag a huge order and suddenly their working capital needs might increase drastically overnight. Now, businesses generally do not have much idle cash lying around. Hence, it is important for them to be able to raise the required financing at a short notice. This is where a business line of credit comes in handy.
A line of credit is a revolving credit facility. This facility can be utilized at any time by the borrower and the commercial bank will start charging interest from that day. The calculation of interest will stop on the day the borrower repays the loan. A line of credit is an open offer by the commercial bank wherein they offer a pre-approved loan that can be utilized at any time.
Difference Between a Term Loan and a Line of Credit
In order to understand what a business line of credit is, we need to compare it with a term loan. Understanding the differences helps in obtaining a better understanding of the overall process.
Advantages of a Line of Credit
The advantages which are commonly associated with a line of credit are as follows:
Disadvantages of a Line of Credit
There are certain disadvantages associated with a line of credit. They are as follows:
The bottom line is that a line of credit is a very useful financial product that is provided by commercial banks to eligible corporations. Even though some corporations may find it expensive, it is a very useful product that helps companies save money, if properly utilized.
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