For most Indian businesses, especially MSMEs, the key to survival and growth is liquidity. When it comes to funding short-term operational needs, working capital loans and lines of credit are two of the most viable financing tools. While working capital loans are widely known, lines of credit (LoC) remain relatively underutilized—largely due to a lack of awareness.
In this blog, we will demystify the line of credit, compare it with traditional working capital loans, and help you determine what’s best for your business.
What is a Working Capital Loan?
A working capital loan is a short-term loan taken to finance everyday business operations—such as salaries, rent, utilities, and inventory.
📌 Key Features:
- Lump-sum amount disbursed
- Fixed interest rate
- Fixed repayment schedule (monthly EMIs)
- Generally secured (though unsecured loans are also available under government schemes)
✅ Suitable For:
- Businesses with seasonal cash flow gaps
- Enterprises that need immediate funding for a specific expense
- Companies with predictable cash flow
What is a Line of Credit (LoC)?
A line of credit is a flexible credit facility that allows businesses to borrow funds as needed up to a pre-approved limit. You only pay interest on the amount you use, not on the total sanctioned limit.
Think of it like a credit card—but for businesses.
📌 Key Features:
- Pre-approved credit limit (e.g., ₹10 lakh)
- Draw and repay funds anytime, within the limit
- Interest is charged only on used amount
- Revolving credit: reuse the repaid portion without reapplying
- Renewal required annually
✅ Suitable For:
- Businesses with irregular cash flow
- Enterprises needing liquidity cushion for emergencies
- Service providers, freelancers, seasonal traders
Pros and Cons Comparison
| Feature | Working Capital Loan | Line of Credit |
|---|---|---|
| Disbursal | Lump sum | Flexible drawdowns |
| Interest | On full amount | Only on used amount |
| Repayment | Fixed EMIs | Flexible repayments |
| Flexibility | Low | High |
| Renewal | Not needed (fixed term) | Required annually |
| Collateral | Usually required | May or may not be needed |
| Usage | One-time needs | Ongoing needs |
| Documentation | Moderate to high | Similar, often lower with fintech lenders |
Advantages of a Line of Credit for MSMEs
✅ 1. Liquidity on Demand
You can access funds only when needed—avoiding interest on unused capital.
✅ 2. Revolving Facility
Once repaid, funds become available again—no need to reapply.
✅ 3. Lower Cost for Irregular Needs
If you borrow occasionally or in small amounts, an LoC saves interest cost compared to a full loan.
✅ 4. Ideal for Emergencies
You always have a financial cushion for sudden expenses or opportunities.
Disadvantages of Line of Credit
⚠️ 1. Renewal Hassles
You may need to renew the facility every year and re-submit financials.
⚠️ 2. Overuse Risk
Easy access to funds can tempt some businesses to overdraw, leading to poor cash discipline.
⚠️ 3. Interest Rates Can Be Higher
For unsecured LoCs, the rates might be slightly higher than traditional working capital loans.
When to Use Which?
🔷 Choose a Working Capital Loan if:
- You need a one-time lump sum (e.g., ₹25 lakh for inventory purchase)
- Your cash flow is predictable and can handle EMIs
- You prefer a fixed repayment schedule
🔷 Choose a Line of Credit if:
- You have irregular or unpredictable cash inflows
- You want a financial buffer for emergencies or new opportunities
- You need small, frequent loans throughout the year
Pro Tip: You can use both. Use a working capital loan for planned needs and a line of credit for unpredictable or seasonal expenses.
Top Providers of Business Line of Credit in India (2025)
| Provider | Max Limit | Collateral | Key Benefit |
| ICICI Bank InstaOD | ₹25 lakh | No (for select customers) | Instant OD based on current account history |
| HDFC Bank Business LoC | ₹10 lakh – ₹50 lakh | Yes (or unsecured for low limits) | Revolving credit with flexible repayment |
| Razorpay Capital | ₹50,000 – ₹20 lakh | No | Ideal for small online businesses |
| Lendingkart LoC | ₹1 lakh – ₹2 crore | No | Quick disbursal, digital process |
| FlexiLoans Credit Line | ₹50,000 – ₹50 lakh | No | Tailored for MSMEs and startups |
Final Word
In today’s dynamic business environment, flexibility and cash flow control are essential. A line of credit can be a game-changer, especially for MSMEs facing seasonal demand or unpredictable payments. On the other hand, working capital loans offer certainty and structured financing for planned needs.
Choose wisely based on your business cycle, comfort with EMIs, and risk appetite. And remember—using financial tools strategically is as important as accessing them.
Need help picking the right funding mix? bizconsulting.io helps Indian businesses compare loans, prepare documents, and build financial strategies that work in the real world.
Tags: Line of Credit India, Business Credit Line, Working Capital Loan 2025, MSME Loan Comparison, Flexi Business Loan India
