Credit Line

What is a Credit Line?

A commercial credit line is an agreement between a business and a bank (or other financial institution) to allow the business to utilize a bank facility (similar to a flexible loan or credit card) up to a maximum agreed value as and when they need it during a specified term.

The cost of a credit line is the interest charged on the drawn down balance and usually a commitment fee based on the entire facility. Repayments are made to agreed terms, but there will normally be a minimum monthly amount to be repaid. A revolving credit line is one which replenishes itself each time a repayment is made by the business.

Using a credit line, the business is only charged interest on the used portion of the credit line, but has the certainty that the facility is available if needed. This is distinct from a loan agreement in which the business will pay interest on the full amount of the loan.

Credit lines have many uses, for example, a business might use a working capital credit line, secured on accounts receivable or inventory, to allow for fluctuating day to day cash flow for purchasing inventory and growing the business.

For further information on a credit line see the Wikipedia definition.

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Last modified October 18th, 2018 by Team

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