Line of credit

Definition

A line of credit is a financial arrangement that allows an individual or a business to borrow a specific amount of money from a lender up to a predefined limit.

What is a line of credit?

Unlike a traditional business loan where you receive a lump sum amount upfront, a line of credit provides the flexibility to borrow and repay funds as needed. Interest is typically only charged on the amount borrowed, and once repaid, that portion of the credit becomes available for borrowing again. It’s a useful financial tool for managing short-term expenses or unexpected costs.

Example of a line of credit

ABC Retailers is a local store that sells electronics and home appliances. The business experiences seasonal fluctuations in sales and occasionally faces challenges with cash flow.

ABC Retailers is approved for a $50,000 line of credit. This means the business has access to a revolving credit facility with a maximum limit of $50,000. The funds can be drawn upon as needed to address short-term cash flow challenges.

The line of credit provides flexibility in repayment. ABC Retailers can choose to repay the drawn amount in full or make minimum monthly payments based on the terms agreed upon with the bank.