For most CAs and tax consultants with their own firm, cash flow problems are a given. Though delayed payments from clients are out of your control, you’re still responsible for paying monthly expenses on time. Whether it is staff salaries or utility bills, you are liable to pay all these costs when they’re due to keeping your firm afloat.
Even if your firm is profitable on the whole, these cash flow problems can be an impediment. To help you tide through this situation, you can opt for a line of credit.
Understanding a Line of Credit
In a nutshell, a Line of Credit, which is a part of a CA Flexi Loan, extends a credit line to you of up to a certain amount that you qualify for. Then, you can withdraw from this Line of Credit as and when the need arises, as many times as you wish to. Its USP is that you only have to pay interest on the amount that you use and not the entire sum offered to you.
Additionally, you can make part-prepayments towards the principal amount whenever your financial situation allows you to.You can also re-avail the prepaid amount if you feel the need. Another benefit that the Line of Credit offers is the interest-only EMIs. You can choose this option and pay only the interest component as EMIs unlike a term loan’s EMI payment, which comprises the principal and interest component. If you choose to do this to manage your cash flow better, the principal is payable only at the end of the tenor.
How you can use a Line of Credit
In line with Aman’s 10-year growth plan for his chartered accountancy firm, he expanded his services to include data mining. To add this vertical, he hired a few more employees and shifted to a larger office space. As a result, Aman was able to secure many new clients and usher his firm into a phase of growth.
But, in line with the terms of the contract that Aman signed with the new clients, he was to receive payments 90 days after completion of the job. In the meanwhile, he still had to pay all his employees as well as pay higher utility bills owing to a larger office.In addition to this, he also had to pay the vendors who supplied the furniture and painted the office. Lastly, Aman had made a payment on behalf of his client and was yet to receive a reimbursement from him.
All these situation culminated into a severe cash flow problem for Aman. He needed funds urgently to keep his business afloat. After analyzing all his options, he visited his lender for a loan account with a Line of Credit of Rs.20 lakh. He used Rs.5 lakh from the Line of Credit to pay salaries, and another Rs.5 lakh to remunerate his interior decorator and to pay utility bills. Three months down the line, Aman received payments from his clients and was able to repay Rs.10 lakh. But, for the three months that Aman had borrowed Rs.10 lakh, he was paying interest only on this amount. The balance Rs.10 lakh was completely interest-free.
While Aman’s firm is financially stable now, the Line of Credit is valid for the entire tenor. So, Aman can withdraw money whenever the need arises, as many times as he wishes to. If in 6 months Aman needs Rs.1 lakh, he can simply make a withdrawal. There is no need for him to re-apply for funds. The amount will be deducted from his credit line, and transferred to his account. To add to the convenience, this request is processed in just 2 hours.
Aman’s decision to rely on a Line of Credit helped him grow his business without worrying about the cost of growth. He was able to hire more employees, shift to a better office and provide better facilities to his clients and rewards to his employees. In turn, better services are sure to lead to bigger clients and better profitability for Aman’s firm.
Key advantages of using a Line of Credit
- You have instant access to funds and complete freedom over how you can use them.
- Interest is payable only on the amount that you actually use and not on the entire Line of Credit.
- Also, interest is calculated only for the duration for which the amount is used, and not the entire tenor. So, if you use Rs.1 lakh and repay it in 3 months, interest will be calculated based on these parameters.
- You can make part prepayments when you have excess funds and can re-avail the prepaid amount too.
- You benefit from choosing to pay only interest in the form of EMIs. This makes this source of finance cost-effective and budget-friendly.
Where can I find a Line of Credit?
Most banks and NBFCs offer a Line of Credit facility along with their loans. But, bear in mind that banks have a more conservative way of approaching a Line of Credit. On the other hand, NBFCs such as Bajaj Finserv offer this facility along with a CA Flexi Loan. Since the loan is collateral-free and offers 1-day approval and disbursal, the Line of Credit comes with the same features as well.
Bajaj Finserv’s Loan for Chartered Accountants is a professional loan that gives CAs and tax consultants access to all the benefits of a Line of Credit, up to Rs.30 lakh. From repaying the principal at the end of the tenor to flexible withdrawals, you can benefit from it all. You can withdraw as and when you wish to, without worrying about filling out application-related paperwork several times.
If you’re a chartered accountant, here’s how you can apply for a Line of Credit, using a CA Loan:
If you’re a tax consultant, here’s how you can apply:
Who should opt for a Line of Credit?
If you often find yourself experiencing cash flow problems or find that they crop up every few months, a Line of Credit is a great option. Once you apply for one, you don’t have to arrange for funds every time the need arises. You can simply turn to the Line of Credit as it offers flexibility with regards to the amount of withdrawals, number of withdrawals, usage, repayment and interest charged. If your business is operating in overdrive to boost its growth, this loan will help you achieve your business goals while ensuring financial stability.