A microentrepreneur may use a credit line

Service Business

The most serious problem facing small businesses is the lack of working capital. Many factors contribute to this - e.g. extending payment terms by contractors or irregular inflow of trade receivables. Not every microenterprise may, but also wants to, in the absence of funds to finance its current operations, ask the bank for a loan. Often the problem turns out to be too short credit history or the lack of adequate security. In such a case, is the owner of the company dependent only on the good will of his contractors? Fortunately, not because there are many solutions on the market that can help you raise working capital.

Principles of the credit line

The easiest and also available for micro-companies way to improve financial liquidity may be a credit line, also known as a revolving loan. It consists in the bank making a limit up to which the entrepreneur can indebted for any purpose. Funds are granted directly from your bank account.

The amount of such a loan depends on the proceeds to the account and is determined individually in a specially signed contract. The credit line is usually granted for a period of 12 months. If the company has managed to settle all liabilities to the lender in a timely manner, the bank usually offers the option to extend the contract for another year.

The credit line is called a revolving loan because the owner of the company can use the funds granted by the bank many times during the term of the contract. This is due to the fact that each payment to the account automatically reduces the debt and allows you to use the funds again. What's more - the entrepreneur independently shapes the repayment schedule of the loan taken. If possible, he may make a payment in the amount of the required minimum, or settle the entire debt.

How much is a credit line?

Entrepreneurs deciding on such a solution certainly realize that it is not free of various types of fees. First of all, interest is charged on the value of the debt after the period specified in the contract has elapsed. In addition, the bank often charges a commission for granting the limit, a fee for its renewal, as well as for the readiness to grant a loan.

The selection of a favorable offer and proper management of the credit line may give the entrepreneur access to free capital. This is due to the fact that if the debt is repaid before the end of the monthly settlement period, no interest will be charged on the negative balance.

A line of credit can also turn out to be very expensive. This will happen in a situation where the entrepreneur will use it in an incompetent way - i.e. he has kept a large balance for a long time, has irregularly repaid his debt, which will result in charging more and more interest.

It should be mentioned that if the credit line operates on a corporate bank account, all commissions and interest will be tax deductible (in the KPiR booked in column 13 - other expenses).