What is a credit line & why it is the most effective MSME credit product?`

Devashish Mulye   /    Product Manager    /    2021-02-06

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Credit Line - A credit product that can be drawn on multiple times and gets replenished as the outstanding amount is paid down in one or more payments.

Credit Line is first and foremost flexible and tries to address multiple shortcomings of traditional MSME-focused credit products. MSMEs’ (e.g. retailers, traders, wholesalers) requirements for credit mirror the volatile business environment they operate in. They face fluctuating demand, high cost of real estate, varying inventory turnover times, and supply chain inefficiencies. The flexibility of a credit line provides the most effective tool to overcome these business challenges.

Embedded finance infrastructure enables digital platforms to distribute these credit lines to businesses efficiently and “in context”. On B2B E-Commerce platforms, a credit line based "Buy now pay later" option significantly improves GMV (Gross Merchandise Value), AOV (Average Order Value), and CLTV (Customer Lifetime Value)

What is a Credit Line?

A credit line is a source of funds reserved for an approved borrower with a fixed limit over a certain period of time, known as a credit limit. Flexibility is the most important feature of a credit line.

  • One time application process - The borrower must only apply once to get a credit limit allocated i.e. underwriting and KYC is only done once

  • Recurring instant withdrawals on-demand - The borrower can then keep withdrawing money recurrently until they reach the credit limit. All subsequent withdrawals are instant.

  • Flexible repayment - For repayment, the borrower may choose bullet repayment options or EMI options with a combination of interest rate and tenure that suits them

  • Interest only on withdrawn amount - Interest is charged on the amount withdrawn from their line of credit and not on the entire credit limit

  • Replenishment of funds upon repayment - Once the loan is repaid, the funds are available for the borrower to withdraw, spend, and repay again in a perpetual cycle, known as revolving credit

A credit line provides flexibility to withdraw amounts as small or as large as required for business activities without incurring costs for unutilized funds. 

How a Credit Line helps MSMEs thrive

MSMEs have unique credit needs. Any credit product geared towards MSMEs should address the conditions they operate in. They face fluctuating demand, high cost of real estate, increasing demand for a wider range of products from customers, varying inventory turnover times, and supply chain inefficiencies. A credit line offers the necessary flexibility to perfectly suit the bespoke needs of MSMEs. Smooth enablement of a credit line helps MSMEs grow their business, lower their overall credit costs and stop overborrowing from expensive lenders. 

MSMEs need quick access to funds multiple times a month for all their operations. This means they need multiple short-tenure small loans with flexible repayment to match the demand fluctuation, inventory turnover times and cash flow irregularities. These needs are not served by classic credit products offered by most lenders. 

A credit line solves all these challenges. It enables MSMEs to borrow only as much as they need and can consume in a short period of time. It also allows them to repay as per their preference. Owing to these factors, a business credit line is perfectly suited for the bespoke credit needs of MSMEs. 

In essence, a business credit line helps MSMEs to grow and thrive. Here are some examples of how a flexible and revolving source of funds benefit MSMEs -

  1. Manage cash flow during irregular income periods - Recurring access to funds combined with flexible repayment options helps MSMEs maintain cash flow during irregular income periods. They help MSMEs stay in business if their customers are late in making payments.

  2. Working Capital Needs - Line of Credit is well suited for short-term working capital needs especially in situations where there are going to be credit needs but it isn’t certain how much. Examples include purchasing stock up-front, fulfilling larger orders during high demand seasons, covering unexpected operational expenses, running marketing campaigns, covering salaries, etc. 

  3. Capitalising on business opportunities - Quick access to funds enables MSMEs to easily capitalise on new opportunities like expanding their business, purchasing raw material to fulfill new contracts, acquiring new clients, opening at new locations etc. 

  4. Avail discounts and reduce expenses - MSMEs can take advantage of bulk discount offers, or buy when material/stock is cheaper.

  5. Borrow exactly the needed amount: A credit line gives variable access to funds instead of one-time access as in the case of loans. MSMEs don’t have to take larger loans than needed in anticipation of possible high demand, only to end up not using it, but still paying interest on it. 

Embedded Finance infrastructure supercharges credit lines

In addition, Embedded Finance infrastructure provides the necessary value additions to make the credit line process effective and smooth, and a true enabler in business.

Tailored credit lines - MSMEs in different sectors like retail, pharmaceuticals, electronics, etc. are dealing with different demands, costs, margins, AOVs, and inventory turnover times. Hence, they all need tailored credit products in terms of loan sizes, interest rates, and repayment options.  FinBox Embedded Credit Line enables digital platforms to leverage their deep knowledge of their customers to tailor the terms of credit to suit their customers. 

Smooth Frequent Transactions - Credit lines are meant to facilitate frequent transactions, it is important for the experience of borrowing to be as smooth as possible. This can be achieved by offering in-context credit and embedding the entire journey of applying, withdrawing, and repaying into a digital platform that MSMEs are on. 

Smooth collections process - Digital platforms can leverage their deep involvement with the end-user. They can send in-context notifications regarding the status of the credit line, send collection reminders, and improve the overall collections process, which could potentially get complex because of multiple running loans.

Approve more customers using platform data - Embedded lenders can make credit lines available to small business owners with less than perfect credit scores that otherwise wouldn’t acquire one from other sources. Embedded Lenders (digital platforms) can harness multiple data points available with them, such as cash flow, number of orders, device data, etc. to determine their customers' credit-worthiness. 

Business Credit Line vs Other Credit Products

There are other credit products in the market that partially address the credit needs of MSMEs. Here are the trade-offs involved with each of them -

Business Credit Line vs Business Loans 

Business loans don’t address volatility of the market -  A business loan is usually taken out for larger amounts to facilitate larger, predictable, one-time purchases, such as buying real estate to expand in a new location. They don’t cater well to working capital needs since business loans are rigid in their terms of repayment.

Business loans encourage borrowing more than needed - Business loans are a one-time loan. In such situations, customers tend to borrow as much as they can and end up paying more interest even if they don’t use the entire amount. This is called overborrowing. A credit line enables MSMEs to only borrow as much as needed. 

Business Credit Line vs Personal Credit Cards

Personal credit cards are expensive - Credit cards have higher interest rates, higher late payment fees, charge multiple additional fees for fund transfers. 

Credit cards trap customers in debt - Since credit cards only set a small portion of the debt as minimum repayment, customers may accumulate a large debt and may stay locked in it for years 

Credit cards have inflexible payment timelines - Business credit cards require monthly payments. Credit lines can be configured to be more flexible when needed.

Benefits for the Digital Platform

Immediate access to on-demand credit enables merchants to make the necessary moves to grow their business. This in turn ensures that more business is done on the platform and improves its stickiness.

  1. Increased CLTV - Enabling effective credit solutions on your platform enables digital platforms to do business with more retailers. It further enables the retailers to do more business, buy high-value SKUs,etc. thereby increasing the platform’s GMV, AOV and CLTV.

  2. Lower user drop-offs - Easy to access credit, tailored for users terms, ensures a delightful user experience. FinBox auto fills data and embeds the entire application process into the digital platform. Digital platforms need not redirect their customers to a third party. This helps reduce drop-offs and increase overall approval rates.

  3. Funds from the credit line can only be used on your platform - This means your wallet share of a retailer would increase. It would also increase the total business conducted on your platform.

Introducing FinBox Embedded Credit Line SDK

FinBox Embedded Credit Line is a set of APIs and SDK that enables any digital platform to embed tailored credit lines for retailers on their platform. These platforms can offer Buy Now Pay Later (BNPL) loans to retailers on their platform. FinBox Embedded Credit Line SDK is built on top of the FinBox Embedded Finance Platform.  

Following are the features of FinBox Embedded Credit Line SDK - 

Fully managed credit line flow - FinBox manages each step of the credit line lifecycle such as application, post-approval, and funds withdrawal. The entire process is fully digital and is embedded entirely into the digital platform.

Instant approval - FinBox approves your retailers in real time and allocates them a credit limit.

Best in market interest rates - FinBox provides credit lines at best in industry interest rates.

Instant payment to platform - The platform is credited the order amount immediately upon order delivery.

Diverse Repayment Options - The repayment method varies from platform to platform. The customer can repay via the platform, or the amount can directly get automatically deducted from their account through eNACH.

Platform Data Underwriting - FinBox leverages your platform data to underwrite, prequalify, and approve more customers.

Tailored credit lines - We collaborate closely with platforms to tailor terms that are perfectly suited for their customer base and help them grow.

FinBox Embedded Finance Platform also packs more features such as a customisable UI, eKYC and user authentication suite, a large lender network, and a proven underwriting suite to increase approval rates.  Read more about the FinBox Embedded Finance Platform and its features