Unlike conventional business loans, a business line of credit does not require borrowers to pay EMIs over a fixed period of time. Also, the revolving loan product enables borrowers to access a fixed amount of funds as and when the need arises. Hence, many entrepreneurs prefer business line of credit (BLOC) to conventional business loans for meeting short-term financial needs. They even have option to choose from two distinct types of business BLOCs – secured and unsecured.
2. Unlike conventional business loans, a business line of credit does
not require borrowers to pay EMIs over a fixed period of time.
Also, the revolving loan product enables borrowers to access a fixed
amount of funds as and when the need arises.
Hence, many entrepreneurs prefer business line of credit (BLOC) to
conventional business loans for meeting short-term financial needs.
They even have option to choose from two distinct types of business
BLOCs – secured and unsecured.
The entrepreneurs can avail unsecured BLOCs without using any
asset as collateral. On the other hand, secured BLOCs require
entrepreneurs to pledge short-term assets like inventory or accounts
receivable as collateral.
3. Normally, unsecured BLOCs are smaller than secured LOCs. Also, the
lending institutions provide unsecured BLOCs only to businesses with
excellent credit score and positive credit track record. However, the
entrepreneurs can use both secured and unsecured BLOCs to finance
short-term working capital needs.
They still need to keep in mind the restrictions imposed by the lending
institutions on using BLOC. For instance, many lending institutions do
not allow borrowers to use BLOC to fund startups, cover past losses, or
meet business expenses not relevant for core business operations.
Likewise, certain lenders allow entrepreneurs to use BLOC only to
finance short-term working capital needs.
That is why; the small business owners must understand the terms of
lending before using BLOC. However, they can still use BLOC for
various purposes.
4. Understanding How Enterprises Use Business Line of Credit
Improve Cash Flow Position
The operating activities of an enterprise are directly impacted by
incoming and outgoing of cash.
The enterprises must explore ways to maintain a positive cash flow
position to carry on business activities smoothly.
Many enterprises use BLOC for improving cash flow position by
accessing funds by paying interest only on the credit they use and
without paying fixed EMIs.
Here are a few tips to manage business cash flow.
5. Making Timely Payroll
Often adverse cash flow position makes it difficult to small businesses
to make payroll fully and timely. Many employees start feeling
demotivated when the payroll is late. Likewise, some employees also
start questioning the enterprise’s financial integrity if the payroll is late.
BLOC makes it easier for entrepreneurs to maintain a positive cash
flow and make payrolls on time.
Manage Inventory Needs
The small businesses and startups must assess and manage their
inventory needs efficiently to supply the products required by each
customer on time.
The seasonal businesses even need to purchase adequate inventory to
meet customer demands during the peak seasons.
6. Many entrepreneurs use BLOC to meet their inventory needs and
purchase inventory. A BLOC is a revolving credit product; it becomes
easier for the business owners to repay the credit as soon as the
products are sold. Also, BLOC makes the fund accessible to purchase
new inventory.
Increase Working Capital
Often lending institutions assess financial health of small businesses
based on their working capital, i.e., current assets minus current
liabilities. The entrepreneurs even explore ways to keep working
capital positive to carry on business activities smoothly and meet
short-term financial obligations timely.
Unlike conventional working capital loans, BLOC enables enterprises
to increase working capital without making fixed monthly payments.