Unsecured loans from banking and financial institutions can serve as a life-line and even a mechanism for growth for a business in India during a downturn. Line of credit products include overdrafts, discounts or waiver of commercial bills, demand loans, and other debt instruments. The business owner is only responsible for interest payments on the used amount of the loan. Lines of credit can be used to develop several opportunities for a business. And now, with lending rates decreasing in India, the time is ripe for a line of credit.

1. Cushion for seasonal sales lows

Businesses with varying revenue streams need capital during slow periods to operate efficiently. A line of credit can help entrepreneurs stay financially afloat in India until excess funds from more lucrative months roll in. Predicting the degree of a seasonal downswing is difficult, making term loans an impractical solution. Fortunately, with a line of credit, borrowers only have to pay interest on the amount used.

2. Ease payment cycle cash crunch

Businesses in India with long accounts receivables often experience cash shortages that hamper business growth and put pressure on maintaining service standards. For example, in the IT staffing industry, companies need to spend a lot of time (sometimes up to 30 days) and money upfront to recruit, train and deploy personnel. Generally, companies do not receive payment for 90 to 120 days. The company is forced to cut costs, like those on training programs, which affects the overall service level. A line of credit against accounts receivables (also known as accounts receivables financing or accounts receivables factoring) solves these issues. Indian lenders fund up to 90 percent of the receivables, depending on the legitimacy of the customer base of the business.

3. Cost Savings

A line of credit gives a business the liquidity to take advantage of discounts available through bulk purchases or cash advances. For example, wholesale distributors of wireless pre-paid phone cards need cash for buying minutes in bulk from telecom companies. Paying upfront can earn the distribution company a 3 to 5 percent discount on the cards. The need for working capital arises when retail customers pay the distributors over a period of 14 to 21 days. Access to cash becomes crucial because discount savings directly improve a business’s bottom-line.