How to use a line of credit effectively without paying interest unnecessarily

A line of credit — whether an overdraft, cash credit, or revolving credit facility — is one of the most useful business financing tools, but it costs money when drawn. Most companies either don't have a line of credit when they need one, or have one and draw it unnecessarily when cheaper alternatives exist.

Set up the line before you need it. This is the cardinal rule. A line of credit approved when your financials are strong, during a period when you don't urgently need it, will have better terms and a higher limit than one applied for during a cash crunch. Banks extend credit to businesses that don't desperately need it and restrict it to those that do. Apply when you're healthy.

Draw only when your cash flow is genuinely negative. A line of credit is a bridge, not a supplement to your operating cash flow. If you have sufficient cash in the bank and are drawing your line, you're paying interest unnecessarily. Draw when your operating cash balance would otherwise go below your minimum comfort level; repay as soon as cash flows back in.

Sweep excess cash against the overdraft daily. If your bank offers a sweep facility, set it up. Every rupee of cash sitting in your current account earning zero (or near-zero) return that could be applied against an overdraft drawing is costing you the overdraft interest rate on that amount. A sweep automatically applies surplus current account balance against the overdraft each day and restores it when needed.

Track your average utilisation. If your overdraft limit is ₹50L and your average daily drawn amount is ₹40L, you're at 80% average utilisation. This suggests either the limit is too small or you have a structural working capital deficit that should be addressed differently — not by increasing the overdraft limit indefinitely.

Review your line of credit annually. Is the limit still appropriate for your current scale? Is the rate still competitive? Has your collateral value changed? An annual conversation with your banker about the facility terms is normal and expected.

END OF BATCH 3 — 25 guides (101–125) Real Estate (105) | Facility Management (105) | Business Loans (105) | Working Capital (110)

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