Limited capital availability can hinder a company’s operation and growth. Therefore, it is critical to ensure sufficient cash-flow to sustain the company. To achieve faster growth, there are two credit options available: Credit lines and business loans.
SMEs find it the most difficult to run smooth operations as the payment cycle is delayed, which results in poor cash-flow in the system. In such a situation, choosing the right option to borrow capital can be based on following factors. Accordingly, SMEs must weigh their options carefully to raise capital. Most common confusion to raise capital is between – credit lines or loans:
- Short-term v/s long-term – In case, your business requires cash for short periods and mostly to cover working capital requirements, then credit line is a better option over business loan. An unsecured credit line allows capital use as per your discretion thus resulting in a smaller interest on repayment. Business loans are suitable for long-term return cycle like 3-5yrs when making one-time investment such as machine purchasing.
- Purchase financing or direct purchasing – Several fin-tech companies like Oxyzo, Power2SME provide unsecured credit lines for purchase financing. This allows you to procure bulk raw-material from your regular suppliers by paying upfront Upfront payments allow you to negotiate hard and get cash discounts. Direct purchasing is availed through direct transaction with the supplier after receiving the business loan amount.
- Collateral requirement – Typically bank loans require you to submit collaterals. However, as an SME you may not have enough collateral to raise frequent capital. Unsecured credit lines allow you to raise capital even if you don’t have any assets and help you grow faster. Valuable collaterals and heavy documentation are needed to secure a business loan.
- Interest plan – For a credit line, interest is paid only for the used amount and for the used period. However, you pay interest on business loans irrespective whether you use the amount or not. Therefore, credit lines are helpful in saving interest.
- Capital flow requirement – SMEs require quick capital availability for short-term requirements. Thus, credit lines processed within 3 days of application by fin-tech companies like Oxyzo etc can help; business loans require considerable advance planning and documentation before approving a loan.
Choosing the right credit option can lead to better returns for SMEs and minimize interest rates. You must decide smartly and avail the right option. We at OfBusiness help SMEs save upto 6% on their bulk material requirements via Smart financing.
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