Month by month on a ₹10 lakh limit: January draw ₹3 lakh, ₹3 lakh used; February draw ₹4 lakh, ₹7 lakh used; March repay ₹5 lakh, ₹2 lakh used; April draw ₹6 lakh, ₹8 lakh used; May repay ₹8 lakh, nothing used; June draw ₹2 lakh, ₹2 lakh used.
Line of credit · revolving finance
Draw it, repay it, draw it again
A line of credit is a limit, not a lump sum. You use what you need, when you need it, and repaying makes the limit available again. That makes it the natural shape for needs that come and go, and a poor one for needs that never leave.
How a revolving limit works
The lender assesses your business and sets a limit: the most you can owe at any time. Within the term of the facility, you draw money as needs arise, whether that's paying a supplier, covering payroll ahead of a large receipt, or buying stock for a big order. Each draw reduces what's available; each repayment restores it.
Interest is usually charged on the amount outstanding, day by day, so a draw repaid in ten days costs roughly a third of the same draw held for a month. That's the core advantage over a loan: you pay for the money only while you're using it.
The facility has a term, commonly a year, after which the lender reviews it and may renew, change or end it. Some lines require the balance to be cleared to zero for a short period at least once a year, to show the facility is funding a cycle rather than a permanent gap.
Line of credit, term loan or overdraft?
| Line of credit | Term loan | Overdraft | |
|---|---|---|---|
| You receive | What you draw, when you draw it | The whole amount at once | Whatever you pay beyond your balance |
| Interest on | Amount drawn, while drawn | Whole outstanding amount | Amount overdrawn, while overdrawn |
| Repayment | Flexible within the terms | Fixed schedule | Flexible; credits to the account reduce it |
| After repaying | Limit is available again | Loan is closed | Limit is available again |
| Where it sits | A separate facility, drawn into your account | A loan account | On your current account |
| Best for | Recurring, variable needs | A one-off purchase or project | Day-to-day swings in the account |
Products and names differ by lender; read each facility's own terms.
What a draw looks like
Once the limit is sanctioned and the documents are signed, drawing is usually quick: a request through the lender's online banking or app, and money in your bank account. For digital credit lines, RBI's rules require that money is disbursed to the borrower's own bank account and repaid directly to the lender, not through anyone else's account.
- 1RequestChoose the amount, within what's available.
- 2CreditMoney arrives in your bank account.
- 3UsePay the supplier, payroll or tax it was drawn for.
- 4RepayFrom the receipts it was bridging; available limit is restored.
What it costs
Interest on what's drawn is the main cost, but not the only one. The Key Fact Statement a regulated lender gives you shows the full picture, including the annual percentage rate. Look for these before signing.
Interest
On the amount drawn, usually calculated daily.
Processing or set-up fee
Charged when the limit is sanctioned.
Renewal fee
Charged by some lenders each time the facility is renewed.
Unused-limit charge
Some lenders charge on the part of the limit you don't use; many don't. Ask.
Reviews, renewals and limit changes
A limit is a promise with conditions. At renewal, and sometimes in between, the lender looks at how the business has done and how the line has been used. Strong results and a line that goes up and down with the cycle support a renewal or a higher limit; a line that has sat fully drawn for months may be reduced.
Going the other way, a limit shouldn't grow without you asking. For digital lending, RBI's directions are explicit: no automatic increase in a credit limit unless the borrower has made an explicit request, which the lender has evaluated and kept on record.
If payroll or a tax payment depends on the line, know the renewal date and what the agreement allows the lender to change before then.
When a line fits, and when it doesn't
The test is whether the need comes and goes. A line is built to be drawn and repaid; if you can't picture it going back to zero within a few months, you probably need a different product.
| Situation | Line of credit? | Why |
|---|---|---|
| A distributor pays suppliers on day 7 and is paid by retailers on day 40 | Fits | The need repeats every cycle and repays itself |
| A retailer builds stock for the festival season | Fits, or a short-term loan | A known peak, repaid from the season's sales |
| A factory buys a new machine | Doesn't fit | The asset lasts years; term finance matches it |
| A business with losses every month | Doesn't fit | Nothing repays the draws; the line becomes permanent debt |
| Occasional large one-off payments | Fits | Draw only when the payment falls due |
Preparing to apply
Lenders set a limit from what they can see of your cash flow, so the application goes faster when your records tell a clear story. Each lender asks for its own list; these are what most of them start from.
- Bank statements for your business accounts, usually for the past year
- GST returns, if you're registered
- Recent financial statements or management accounts
- KYC documents for the business and its owners or directors
- A short note of what the line is for and how draws will be repaid
Secured or unsecured
Some lines are secured against stock, receivables, property or deposits; others are unsecured, based on the business's cash flow and record. Security usually means a larger limit or a lower rate, and it also means the lender has a claim on that asset if things go wrong.
Read what the security covers. A charge over all receivables, for example, can limit how you finance invoices elsewhere, such as through invoice discounting.
| Secured | Unsecured | |
|---|---|---|
| Backed by | Stock, receivables, property or deposits | Cash flow and track record |
| Limit and price | Often larger, often cheaper | Often smaller, often dearer |
| Paperwork | Valuation and charge documents | Lighter |
| Watch for | Assets tied up for other financing | Personal guarantees from owners |
Using a line well
Draw for a reason, repay from a receipt. Every draw should name the collection that will repay it.
Watch utilisation, not just the balance. Average use as a share of the limit tells you whether it's funding a cycle or a hole.
Keep some of it free. A fully drawn line isn't a buffer any more.
Don't buy long-lived assets with it. Equipment and premises belong on term finance.
Repay early when cash comes in. Interest stops when the money goes back.
Keep records tidy. Clean statements and accounts make renewals smoother.
Where Peneu fits
Credit lines are provided by regulated lenders. Peneu isn't presented here as a lender, and no limit, rate or lending partner is named. Whether Peneu works with any lenders, and on what basis, is confirmed during onboarding. For how working capital finance fits together more broadly, see the working capital guide.
Line of credit questions
What is a business line of credit?
A limit a lender sets for your business that you can draw from when you need to, repay, and draw from again, without applying afresh each time. Interest is usually charged on the amount drawn, for the days it's drawn.
How is it different from a term loan?
A term loan gives you the whole amount at once and you repay it on a fixed schedule; once repaid, it's finished. A line of credit stays open for its term: you use as much of the limit as you need, when you need it, and repaying makes that amount available again.
Is a line of credit the same as an overdraft?
They work alike: both are revolving limits with interest on what's used. An overdraft is attached to your current account, so you draw simply by paying from the account. A line of credit may be a separate facility you draw from into your account. Product names vary by lender.
Can the lender reduce or cancel the limit?
Lenders review limits, usually at renewal and sometimes in between, and can reduce, suspend or not renew them depending on the terms of your agreement. Read what the agreement says about reviews before relying on the limit for critical payments.
Can my limit go up automatically?
For digital loans and credit lines, RBI's Digital Lending Directions say a regulated lender must not increase a credit limit automatically; it needs your explicit request, which the lender evaluates and keeps on record.
How is interest calculated on a line of credit?
Usually on the amount outstanding each day, at the agreed rate, and charged monthly. Drawing ₹2 lakh for ten days costs roughly a third of drawing it for thirty. The Key Fact Statement shows the rate, fees and APR for your facility.
Does Peneu offer a line of credit?
Credit lines are provided by regulated lenders such as banks and NBFCs. Peneu isn't presented here as a lender. Whether Peneu works with any lenders, and on what basis, is confirmed during onboarding.
Official sources
- RBI — Reserve Bank of India (Digital Lending) Directions, 2025 (8 May 2025)No automatic limit increase; disbursal to the borrower's account; repayment direct to the lender; KFS.
Last reviewed . Examples, amounts and screens marked illustrative are not Peneu figures.