Introduction

India is a developing nation where the availability of credit is a critical factor for personal level, business owners, and the country as a whole. Credit facilities are one of the most vital financial resources that enable people and businesses to set and achieve goals.

We will, in this article, understand the basics of credit facilities, their types, their meaning in a business context, and what to look at while selecting them.

Basics of Credit Facility

A credit facility can be defined as an agreement between the lender and the borrower whereby the borrower is allowed to draw down funds from the lender up to an agreed maximum limit. Banks, financial companies, and other lending entities usually provide such a facility. Credit facilities help people and businesses manage cash flow, avail urgent requirements in finance, and make investments in growth prospects.

Types of Credit Facilities

These credit facilities come in various forms as required by the borrowers’ needs. Some of the well-known types are:

• Business Loans: These loans are made available to a business that would be used to assist it in its operations or expanded activities. It can either be secured or unsecured upon the amount and purpose. Some vendors provide instant business loan options as well.
• Personal Loans: Given to the individuals for personal expenditures, such as marriages, travels, medical emergencies, or education. The personal loan is entirely unsecured and carries no collateral therefore easy to borrow.
• Credit Cards: A credit card is another type of revolving credit facility. The facility to make purchases and pay later is offered by credit cards. Credit cards are used the most on daily expenses. They provide other benefits like reward points, discounts, and interest-free periods.
• Overdraft Facility: Overdraft is a facility through which the account holder is enabled to withdraw more money than what is there in the account. It is the short-term credit facility applied by businesses to overcome cash flow problems.
• Home Loans and Auto Loans: These are loan products whereby one borrows for the purchasing of property or vehicle for personal use or business use and those properties or vehicles themselves work as collateral for the loans.
• Trade Credit: Sometimes businesses use a trade credit facility to make purchases of commodities and services and pay back later. That helps businesses retain working capital.
• Agricultural Loans: These loans are advanced to the farmers for purchasing seeds, fertilizers, or any equipment. The government usually subsidizes such loans to encourage the agricultural sector.

Credit Facility Definition in a Business Perspective

This allows a company to manage its day-to-day activities as well as its expansion. Credit facilities can allow a business to pay for its business operations, produce expenses on new projects or even costs not expected to have been incurred.

For instance, a manufacturing corporation can buy all the required raw materials for its production both at the peak season as well as when the cash constriction occurs. New small companies literally borrow and exploit unsecured business loan and credit lines in the form of primary tools through which they can establish as well as expand their business ventures. Being able to acquire capital at just the right time is imperative to the ability of businesses to operate within an economic range and support their market competitiveness.

Moreover, Credit facilities also allow a business to develop its credit history, which further helps a business to borrow in the future on better terms. A specific business that has been developing a business with a good credit history, works for lenders in gaining more trust in it, as a financially stable business.

Factors to Keep in Mind While Considering a Crediting Option

Credit Facilities are of great advantage, but the choice to go for them has to be considered fully. As such, here are a few things that need to be kept in mind:

• Purpose: Clearly define the purpose of the credit facility. If it is for personal use, a business need, or a significant investment, understanding your requirements will enable you to choose the proper type of credit.
• Interest: Compare interest rates from various sources. Low interest rates mean a lower overall cost of borrowing.
• Repayment terms: Understand the payment schedule and terms. You can select an option that will be suitable for your personal financial situation to avoid defaults or penalties.
• Credit Score: Your credit score is the greatest deciding factor for whether or not your application will be accepted, and at what rate. Maintain a good credit score by paying your bills within due dates and not owing a lot of money.
• Collateral Requirement: Some credit facilities are required to have collateral, that is, property or business assets associated with your business. Only pledge collateral if you feel secure with the risks involved.
• Hidden Costs: These include processing fees, penalties and other concealed charges that increase the cost of borrowing.
• Lender’s Reputation: Research the credibility of the lender and their customer service. A good lender will provide transparent terms and support during the loan tenure.

Conclusion

It’s tough for many owners of MSME businesses to obtain an business loan, probably because of the lack of information as to how one goes about it or finding a lending partner. In this article, you will be helped to split the process into workable steps of acquiring a business loan, hence making it easy to get the loan. Begin by stating your financial requirements and checking the various loans you can receive.

NBFCs are also critically important providers of credit facilities in India. Such entities can offer credit like the banks but on less tough terms. The NBFCs are very important for people as well as for companies belonging to rural and semi-urban areas who do not gain access to full banking services. They also help bridge the gap within the provision of credit necessary for agriculture, small businesses, and personal finance among others. NBFCs in India are a crucial part of the financial system, as they focus on their clients.