Lines of Credit

A line of credit is a borrowing facility that is extended by a lender. Lines of credit have limits as to how much money can be drawn and payments that are required to be made for them usually are a combination of principal and interest monthly at a percentage of the balance that is owed on a specified date every month.

Borrowers are under no obligation to draw funds from the credit facility. However, funds can be drawn at any time to the maximum that is permitted. Lines of credit are usually issued “on a demand basis”, which means that there is not set term and that the lender does have the option to demand repayment at any time. The foregoing usually only happens when borrowers do not adhere to the repayment terms and conditions. However, lenders have been known to reduce limits on lines of credit in economic downturns.

Lines of credit are usually used to finance day-to-day business operations and depending on the sum are secured by either promissory notes, assignment of receivables, or both.