For years, businesses have used credit lines to cover working capital requirements and take advantage of the prevailing investment possibilities. Line of Credit is adaptable, attempting to address a few issues of traditional MSME credit solutions.
The credit requirements of MSMEs (e.g., retail businesses, merchants, and wholesalers) reflect the unpredictable business setting in which they operate. They have to deal with changing demand, expensive real estate costs, varied inventory turnover periods, and inefficient supply chains. A credit line’s versatility makes it the most beneficial tool for overcoming these issues. So, what is a Line of Credit, and why is it ideal for MSMEs? Read to find out.
What is a Line of Credit (LOC)?
A line of credit (LOC) is a set amount of money borrowed over a set period. In the case of an open line of credit, the borrower can accept funds as needed until the maximum amount is exhausted. As repaid, the borrower can access the funds. LOC is a contract between a financial institution (typically a bank) and a consumer that defines the maximum loan amount accessible to the borrower.
The fundamental advantage of a line of credit is its constructed flexibility. Borrowers have the option to request a specific amount but are not required to utilise it all. In contrast, a borrower can customise LOC expenditure to their particular needs, paying interest only on the money drawn, not on the whole credit line. Borrowers can also change their payments amounts based on their budget or cash flow as desired. For instance, you can repay the entire credit amount at once or monthly.
Advantages of Line of Credit for Individuals & Businesses
- Banks charge a lower rate of interest for LOCs than they do for standard loans.
- In a line of credit, the borrower can take the required amount, but in traditional lending procedures, the lender determines the minimum amount.
- Self-employed people and MSMEs benefit from LOCs because they can take a lower amount and start their business with less risk.
- A security to the business enterprises like MSMEs, as they have a reserved amount to fulfil their business requirements when needed.
- When compared to the limited loan supplied by conventional lenders, you can anticipate a relatively high credit limit.
- The borrower can then continue withdrawing cash until the maximum credit limit. Following that, all withdrawals are instantaneous.
Why is Line of Credit ideal for MSMEs?
MSMEs have special credit requirements. Any lending product aimed at MSMEs should take into account the circumstances in which they operate. They face fluctuations across the length and breadth of their operations. As mentioned, the Line of Credit is capable enough to address the challenges an MSME faces.
A credit line provides the required flexibility to meet the unique requirements of MSMEs. MSMEs can develop their businesses, cut their total credit costs, and avoid over-borrowing from pricey lenders if a credit line is enabled smoothly.
MSMEs require constant access to finances every month for all of their functions. To match market changes, inventory turnover periods, and cash flow instabilities, they’ll need several short-term modest loans with flexibility in repayment terms. Most lenders’ traditional lending products do not meet these requirements. A credit line can solve all of these problems. It allows MSMEs to borrow only the amount they require and can use it in a short time. It also permits firms to repay in the manner of their choice. Because of these considerations, a business credit line is ideal for MSMEs’ distinctive credit requirements.
A business credit line, in short, aids MSMEs in their growth and development. Here are some instances of how a continuous and flexible source of revenue might help MSMEs:
1. Efficient cash flow
MSMEs can maintain cash flow during sporadic income periods by combining recurring access to finance with flexible repayment alternatives. They assist MSMEs in remaining in business when their clients are late with payments.
2. Working Capital Needs
A line of credit is ideal for short-term working capital requirements, particularly in instances when the amount of credit required is unknown. Purchasing inventory in advance, fulfilling bulk orders during peak demand seasons, covering unanticipated operational expenses, executing marketing campaigns, and supporting salaries are just a few examples.
3. Exploring business opportunities
Ease of access to finances allows MSMEs to easily take advantage of new prospects such as growing their operations, purchasing raw materials to complete new contracts, recruiting new clients, and establishing new regions.
4. Discounts and cost-savings
MSMEs might take advantage of bulk discount offers or purchase when material/stock is inexpensive to get discounts and cut costs.
5. Borrow what you need
Unlike loans, LOC provides changeable access to funds rather than one-time access. MSMEs do not need to take out larger loans than they require in anticipation of possible increased demand, only to find themselves unable to repay the loan while still paying interest.
With all the benefits LOCs provide for MSMEs, it makes sense to choose this credit system if you haven’t done so already.
But wait, what if the Line of Credit you choose is from an embedded finance infrastructure? That could add value to your entire credit process. Let’s explore this further.
A LOC with Embedded Finance features
Embedded Finance infrastructure adds value to the credit line operation, making it an efficient and profitable core strategic enabler.
1. Customised credit lines
MSMEs in many industries, such as pharmaceuticals, retail, and electronics, deal with various factors. That includes prices, demands, AOVs, margin, and inventory turnover times. As a result, they all require customised credit solutions that include loan quantities, interest rates, and repayment alternatives. The Embedded Loan Line from Finezza allows digital platforms to adapt credit conditions to their consumers based on their extensive understanding.
2. A hassle-free borrowing journey
Because credit lines aim to promote frequent transactions, the borrowing journey must be as painless as possible. It is possible by providing in-context credit and integrating the entire application, withdrawal, and repayment process into a digital platform used by MSMEs.
3. A seamless collection process
Digital platforms can take advantage of their relationship with customers. They can deliver in-context updates about the credit line’s status, send collection notifications, and simplify the whole collection process, which gets complicated when numerous loans are active.
4. More approvals through data platform
Embedded financiers can provide credit lines to smaller businesses and MSMEs with even lesser credit scores. It is unable to obtain one from other providers in the usual scenarios. Embedded financial institutions can use multiple data points to establish their MSME’s creditworthiness, including cash flow, amount of sales, device data, and so on.
Line of Credit seems to be a versatile credit system with various advantages that could fit the criteria of MSMEs. The benefits are something not to miss on. Ease of repayments, the flexibility of loan amount, interest on the amount used, and a reserve for future business needs. What else could be an ideal option than this? That with embedded finance platforms could bring more value to your table to the entire credit process system. At Finezza, you can avail Loan Lifecycle Management platforms and credit scoring services by providing AA integrations and useful APIs. To know more about how we can help your lending business, get in touch with us.