Line of Credit
A line of credit is an amount of money that a bank is prepared to extend to its clients over a particular period of time. The client may make full use of those funds right away, or they may make a series of withdrawals over the time period for which the credit has been extended. The funds on offer are normally unsecured, requiring no matched collateral being presented to the lending authority as security in the event that the lender defaults on the initial loan. A line of credit or credit line is a very flexible facility in that it provides a quick access to funds.
On the downside, a line of credit can be withdrawn at any time should the borrower have given any cause for concern to the lending authority. The flexibility of the line of credit arrangement is also reflected in the facility of the borrower to pay back their original loan and to draw on the credit limit once again. Lines of credit are normally reviewed by the lending authority on an annual basis.
Unsecured credit lines are important for many business operations as they provide a flow of funds that are required to keep businesses ticking. As businesses have fluctuating requirements, so a line of credit is vital in supporting that business should it run low on short-term capital. As these loans are unsecured, they can be utilised at short notice – something that any business manager will find essential.
Often banks and other financial institutions will be hesitant to extend lines of credit to businesses that don’t possess good business records. These lending organizations are in the business of making money and reducing risk, and a business that can show a good track record is more likely to receive those vital funds at short notice.
Once you apply for your unsecured line of credit, you will be scrutinized from all angles for the reasons why you require those funds as well as your ability to repay your loan in the future. On the positive side, you will only ever be charged interest on the actual funds that you use, and not on the full line of credit available to you.
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