Line of Credit

Financial Dictionary -> Loans -> Line of Credit

A line of credit is not necessarily considered a loan, although it is a form of credit extended by a bank or other financial institution similar to a loan in that it leaves the borrower in debt, albeit usually in the short term.

A line of credit can take the form of:

Bank Overdrafts - a service that temporarily allows a person or business to go overdrawn in their bank account without having to pay any bank charges. There may be an interest fee applied.

Cash Credit - a short term cash loan of a relatively short amount. There is usually a high interest rate and the loan is paid back in full with one sum, as opposed to monthly installments.

Inventory Finance - a loan which is only paid back when a business' stock or inventory has been sold in order to recoup the money needed to pay the loan.

There are various other forms of credit that may be used, including demand loan, export packing credit and more.

A line of credit is only usually given to a trusted borrower or a respected business. The main purpose of a line of credit is to overcome cash flow and liquidity problems. Many businesses have to pay suppliers before they get paid by their customers and therefore need a short term loan to bridge this gap in cash flow. The traditional use of an overdraft is the most common service in this situation and allows the business to go in to red when paying suppliers, as long as they get their revenue from their customers within a given time.

Inventory finance is very similar in that a business is allowed to sell their stock before having to repay the loan. It may be that the money made from selling their inventory is the only available cash to pay the loan.

Individuals are only usually given a small overdraft if warranted.