A business line-of-credit is a type of flexible pre-approved commercial financing in which a maximum loan balance is set by a bank or lender in which the borrower can draw on the funds whenever they wish. A line-of-credit can range in sizes from $5,000 for very small businesses, to well over $5,000,000 for mid-size companies. Repayments for lines-of-credit are made in various fashions, including monthly, weekly and even daily by some lenders.
While each lender has their own criteria for their lines-of-credit, a large number of lenders like to secure their lines of credit with assets such as accounts receivable or the equity in their hard assets. A lender will extend a line-of-credit to a business based of a percentage of the A/R or net value of the hard asset. Other banks and commercial lenders will provide lines-of-credit on an unsecured basis provided the company is creditworthy, and the financials support the facility.
While there are many advantages to a line-of-credit for a business, the most advantageous may be the fact that a LOC allows a company to borrow as much money as they need without having to go through an approval process with a lender. The financing is pre-approved and is readily available to draw upon until they reach the maximum allowed.
What makes a line of credit most advantageous is the fact that interest is only paid on the amount that is drawn from the line of credit, and not from the overall size of approved funding related to the financing facility.
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