Micro, small, and medium-sized enterprises (MSMEs) have emerged as the backbone of the global economy. Despite their significance, they often struggle to secure funding from traditional financial institutions due to their lack of credit history or collateral. This is where Line of Credit (LOC), a type of credit product, play a crucial role in meeting the financial needs of MSMEs. In this article, we will discuss what LOCs are and their role as credit products.

What is a Line of Credit (LOC)?

A Line of Credit (LOC) is a type of loan where a lender provides a borrower with access to a specific amount of credit, which the borrower can withdraw as needed within a set period. It works like a credit card, where the borrower can withdraw funds as required and pay interest only on the amount withdrawn.

LOC has a predetermined credit limit and a set term, which could be renewable or non-renewable. Interest rates on LOCs can be variable or fixed, depending on the terms of the agreement. The borrower can withdraw the LOC through different modes like cash, check, or electronic transfer.

Benefits of LOC as MSMEs Credit Product

As an MSME, finding the right credit product can be crucial for managing cash flow and supporting growth. LOC can be a game-changer, offering a flexible credit facility that provides quick access to funds when needed, allows businesses to pay interest only on the money drawn, not on the whole credit line, and helps them respond to unexpected expenses or opportunities. Let’s dive into the specific benefits of using LOC as an MSME credit product.

1) Flexibility

The primary role of LOC is to provide flexibility to MSMEs in managing their finances. MSMEs face fluctuations in cash flow, and LOC allows them to manage these fluctuations effectively. MSMEs can withdraw funds as needed and pay interest only on the amount withdrawn. It helps to reduce the cost of borrowing for MSMEs, as they do not have to take out a loan for a fixed amount and pay interest on the full amount, even if they use only a small portion of it.

2) Working Capital Management

LOCs are an excellent tool for MSMEs to manage their working capital requirements. Working capital is the difference between current assets and current liabilities. MSMEs often face a shortage of working capital due to delays in payment from customers, which affects their ability to meet operational expenses. LOC provides MSMEs with access to a reliable source of short-term finance to manage their working capital requirements.

3) Credit Score Improvement

LOCs can also help MSMEs build their credit score. A credit score is a measure of a borrower’s creditworthiness and is used by lenders to assess the risk of default. MSMEs that have good credit scores are more likely to get approved for loans and other credit products. LOC allows MSMEs to establish a credit history and demonstrate their creditworthiness.

4) Capital Expenditure

MSMEs often require capital expenditure to invest in new equipment or technology to expand their business. LOCs can be an effective way to finance such expenditures. Unlike term loans, where MSMEs have to pay interest on the entire amount borrowed, LOCs allow them to pay interest only on the amount withdrawn.

5) Cash Flow Management

One of the biggest challenges MSMEs face is managing their cash flow. LOCs can help MSMEs manage their cash flow more effectively by providing them with access to short-term funds. This can be especially important during slow periods, when revenues may be lower than usual. With LOC, MSMEs can withdraw funds as needed to cover their expenses and pay interest only on the amount they use.

6) Seasonal Business

Many MSMEs have seasonal business cycles, where they experience peaks and valleys in their revenues throughout the year. LOCs can help MSMEs manage their cash flow during slow periods by providing them with access to funds when they need it most. This can help MSMEs bridge the gap between the slow periods and the peak seasons when revenues are higher.

7) Vendor Discounts

MSMEs that have access to LOC can take advantage of vendor discounts. Suppliers often offer discounts to customers who pay their bills early or in advance. With LOC, MSMEs can take advantage of these discounts without having to pay the full amount upfront. This can help MSMEs save money on their purchases and reduce their overall cost of doing business.

8) Business Expansion

MSMEs that are looking to expand their business can benefit from LOCs. Whether it’s opening a new location or launching a new product line, business expansion requires capital. LOCs can provide MSMEs with the funds they need to invest in their business and achieve their growth objectives.

9) Emergency Funds

Finally, LOC can also serve as an emergency fund for MSMEs. Unexpected events, such as natural disasters, equipment breakdowns, or a sudden drop in demand, can significantly impact MSMEs. With LOC, MSMEs can access funds quickly to deal with these emergencies and minimize the impact on their business.

The cash flow solution MSMEs have been waiting for – The Protium app

From working capital management to business expansion and emergency funds, LOCs provide MSMEs with the flexibility and access to the capital they need to succeed. By choosing the right LOC and managing it responsibly, MSMEs can improve their financial health and achieve their business objectives.

At Protium, we actively focus on disrupting the lending space by making innovative financing solutions accessible to businesses in a simple and secure manner. As a small business owner, you can get the best financing options at competitive interest rates and a hassle-free repayment process – all with just a few taps on your phone. Download the Protium app today!

Feel free to get in touch with us in case you have any queries.