If your business has a clear plan for development, it often becomes necessary to use a loan. A credit line is a long-term loan, which involves not a one-time provision of funds, but portion financing within the established limit. This is a kind of subscription for several loans.
There are two types of credit lines:
- Renewable or with a debt limit. The borrower decides how often and what part of the total amount he or she will receive. With such a scheme, the limit is renewed each time precisely for the amount that the borrower transferred as debt repayment.
- Non-renewable or with a limit of issue. Such a lending scheme involves a clear division of the entire amount into equal parts and time intervals.
For example, you take a credit line for $100 thousand for 2 years. An agreement with a debt limit will allow you to receive 10 thousand dollars in the first month, another 30 thousand – in a couple of months, 10 thousand – again in six months, and then the second part. The term of the credit line is usually from 1 to 3 years, but in rare cases, it can be extended to 5-7 years. Its duration depends on the amount and purpose for which the loan is allocated.
Advantages of Credit Lines
Such long-term lending has several advantages over ordinary loans:
- Convenient interest calculation system. The percentage is taken only for that part of the total limit, which has already been granted.
- It saves time, effort, and money through a one-time inspection of many further credits.
- Free debt repayment schedule. Payments are made by different sums and with different frequency. Some lines of credit allow you to pay interest every month and leave the principal debt at the end of the contract.
Secured Credit Lines
A prerequisite for the provision of a credit line is to find the main settlement account of the company in the lending bank. The second criterion is solvency. The borrower must have a regular and sufficient cash flow. If the borrower’s credibility is in doubt, or a credit line is required for more than two years, the bank may need a guarantee or a pledge. Real estate is the most popular pledge since it has high liquidity.
It is advisable to attach a business plan or forecast of the company’s financial inflows for the near future to an application for a credit line. Based on all the information provided, the bank sets the maximum possible limit on the amount and duration of the credit line. The credit line is not the best option for start-ups. It is excellent for the development and expansion of an already well-functioning business.
Price of the Credit Line
The price of the credit line consists of a commission, which is 1-2 of the limit amount, and secured personal loan interest rates on the use of money. It varies from 12 to 25 per annum. In the case of registration of collateral, an additional expense will be payment assessment and property insurance.
If you find it appropriate for your enterprise, apply for a credit line or a secured loan. Just make sure that you have thoroughly studied all the available information in advance.