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
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