A line of credit sets a maximum amount of funds available from the bank, to be used when needed, for the ongoing working capital or other cash needs of a business.
The lines are typically offered for renewable periods that range from 90 days to several years, although extended periods are usually subject to annual reviews by the lender. The maximum amounts vary greatly; interest rates usually float and you pay interest only on the outstanding balance. Money is typically used for daily operations, such as inventory purchases, and to cover periodic or cyclical business fluctuations. Collateral for the loan is often accounts receivable or inventory.
From a lender's perspective, the adequacy of the borrower's cash flow is the most critical consideration. A commitment fee may be assessed by the bank for making a line of credit available to the borrower, even if the full amount is never used. An established business with a sound credit history may be able to obtain an unsecured revolving line of credit.
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