Line of Credit
What does it mean
A Line of Credit is a loan type where a borrower is allowed to borrow, repay and borrow again up to a preset limit. Typically the required minimum payment required on a line of credit is just the accrued interest.
Why does it matter
A Line of Credit is a frequently used loan product. The most common use case for a Line of Credit is for the financing of items such as Inventory. In this scenario, the borrower advances dollars from their line of credit to purchase Inventory. The borrower then sells the Inventory which results in the creation of an Accounts Receivable. When the Accounts Receivable is ultimately paid, the borrower then uses those funds to repay the amount borrowed on their Line of Credit. This activity is then repeated going forward. The benefit to the customer of using the Line of Credit is that it can result in lower Interest Expense because the borrower is able to repay the principal at certain points of their Operating Cycle.
Other Relevant Terms
Want to Master Banking's Favorite Ratio?
The Debt Service Coverage Ratio (DSCR) is one of banking's favorite ratios. Want to ace it without breaking a sweat? No problem! We've got some simple, no-fuss pointers that will help you nail this ratio every time. You've got this!
Get the Cheatsheet NowNot Finding What You Are Looking For?
Let me know what terms, ratios or content you want to see covered.
Request Term or Ratio
Am I missing a key term or ratio? Let me know what you want to see covered.
Request Content
Do you have a topic idea you'd like to see covered? Send it my way.
Checkout Courses
Enhance your skills through a deeper understanding of your customers' businesses.
A bit about me
Greetings! I'm Clay Sharkey, and there is nothing I like more than assisting others in achieving their goals. I firmly believe that by enhancing a banker's understanding of their customer's' business, they can provide superior service. This superior service, in turn, leads to stronger relationships for the bank, improved performance for the businesses, and better experiences for our communities. Win-win-win.
