The meaning of a line of credit can be understood very quickly. Let's say it's a financial cushion for which you only pay when you use it.
The bank provides you with a certain amount of money, the "authorized limit" of the line, in a credit account, which works just like a checking account. Within that limit, you can draw on the money when you need it, and you only pay interest on the amount you have drawn down.
As for repayment, it is also free: you can repay the amount you have drawn down at your own pace, without fixed monthly maturities, within a much longer term that can even exceed one year.
In short, the line of credit is a flexible financing product for which you pay only when you use it and only for the time during which you have drawn down the money. At the end of the month, the only sure payment is the interest. The date of repayment of the "principal" is decided by you, but the sooner you repay, the less interest you pay.
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Normally, the line of credit is popular with SMEs and the self-employed, who often use it to meet their payments when they do not have enough cash on hand.
It is interesting for professionals, as it gives them peace of mind at key moments for the business, since things do not always go as expected. Also, sometimes, non-payments or late payments from customers are unavoidable, so it is advisable to always have a plan B.
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There are important differences that could help you choose one financial product or the other.
For example, when you apply for a loan, you receive the money in full and you are informed that you must pay it back within a certain period of time: the maturity. You also repay the amount borrowed and the interest accrued month by month, no matter what.
However, in a line of credit, the bank provides you with an account with money and you use it when you want, all or only a part of it.
Another important difference is that the line of credit is usually renewed when it matures, as long as the company or individual still needs it and the bank approves the risk again. In contrast, traditional loans cannot be renewed.
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Benefits of the line of credit
To find out if this option is good for you, we inform you that the main benefits of a line of credit are:
Flexibility: it is very reassuring to be able to have money available for when you need it, whether you need it or not. A plan B at all times to manage the company's cash flow with absolute flexibility.
Convenience: another strong point is convenience, since the credit account works like a regular checking account and can be used to finance day-to-day business, pay suppliers, pay salaries, etc.
These are the main advantages of the credit line. What is clear is that this is a little-known financial product that could fit your needs. Therefore, it is important for you to get to know it.
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