Line of Credit
Revolving Borrowing Facility with Flexible Drawdown and Repayment
Line of Credit (LOC) is a flexible borrowing arrangement between a lender (typically a bank) and a borrower that establishes a maximum loan balance the borrower can draw upon as needed. Unlike a term loan with a fixed disbursement, a line of credit allows repeated drawdowns and repayments up to the approved limit, often with interest charged only on the outstanding amount.
What Is a Line of Credit?
A Line of Credit provides pre-approved access to funds up to a set limit. The borrower can draw any amount at any time (subject to availability), repay, and redraw as needed during the term.
It functions like a credit card for businesses or individuals—flexible working capital financing without fixed installments.
Revolving nature distinguishes it from term loans (single disbursement, fixed schedule).
Common Types of Lines of Credit
- Secured LOC: Backed by collateral (inventory, receivables, real estate)
- Unsecured LOC: Based on creditworthiness (higher interest)
- Committed LOC: Lender obligated to provide funds (commitment fee)
- Uncommitted LOC: Lender discretion (lower cost, less reliable)
- Revolving Credit Facility (RCF): Large corporate version, often syndicated
- Personal/Home Equity Line of Credit (HELOC): Consumer versions
Business LOCs often used for short-term needs; larger RCFs may have longer terms.
Key Features and Terms
- Credit limit: Maximum drawable amount
- Drawdown: Borrowing against the line
- Interest: Variable rate (prime + margin) on outstanding balance only
- Commitment fee: Percentage on undrawn amount
- Covenants: Financial ratios, restrictions
- Maturity: Typically 1-5 years, renewable
Balance Sheet Presentation
On the balance sheet:
- Drawn amount: Recorded as liability (usually current)
- 'Line of Credit' or 'Bank Overdraft/Revolver' line
- Often under 'Current Debt' or 'Other Current Borrowings'
- Undrawn commitment disclosed in footnotes (off-balance-sheet)
- Long-term revolvers may split current/non-current
Interest accrued separately if material.
Advantages and Uses
- Flexibility for seasonal or unpredictable cash needs
- Cost-effective (pay interest only on used funds)
- Working capital management
- Bridge financing
- Backup liquidity (committed lines)
Analytical Considerations
Lines of credit impact analysis by:
- Providing liquidity cushion (undrawn capacity)
- Increasing short-term debt burden when drawn
- Potential covenant breaches triggering acceleration
- Commitment fees as ongoing cost
- Comparison of drawn vs. total facility for utilization
Heavy reliance on short-term LOCs can signal liquidity risk or rollover concerns.
Key Takeaways
Line of Credit is a revolving borrowing facility with flexible drawdown.
Interest only on outstanding balance; commitment fee on undrawn.
Classified as current liability (drawn amount); undrawn off-balance.
Provides liquidity and working capital flexibility.
Secured/unsecured; committed/uncommitted variants.
Monitor utilization, covenants, and renewal risk for liquidity assessment.
Line of Credit
Revolving Borrowing Facility with Flexible Drawdown and Repayment
Line of Credit (LOC) is a flexible borrowing arrangement between a lender (typically a bank) and a borrower that establishes a maximum loan balance the borrower can draw upon as needed. Unlike a term loan with a fixed disbursement, a line of credit allows repeated drawdowns and repayments up to the approved limit, often with interest charged only on the outstanding amount.
Table of Contents
What Is a Line of Credit?
A Line of Credit provides pre-approved access to funds up to a set limit. The borrower can draw any amount at any time (subject to availability), repay, and redraw as needed during the term.
It functions like a credit card for businesses or individuals—flexible working capital financing without fixed installments.
Revolving nature distinguishes it from term loans (single disbursement, fixed schedule).
Common Types of Lines of Credit
- Secured LOC: Backed by collateral (inventory, receivables, real estate)
- Unsecured LOC: Based on creditworthiness (higher interest)
- Committed LOC: Lender obligated to provide funds (commitment fee)
- Uncommitted LOC: Lender discretion (lower cost, less reliable)
- Revolving Credit Facility (RCF): Large corporate version, often syndicated
- Personal/Home Equity Line of Credit (HELOC): Consumer versions
Business LOCs often used for short-term needs; larger RCFs may have longer terms.
Key Features and Terms
- Credit limit: Maximum drawable amount
- Drawdown: Borrowing against the line
- Interest: Variable rate (prime + margin) on outstanding balance only
- Commitment fee: Percentage on undrawn amount
- Covenants: Financial ratios, restrictions
- Maturity: Typically 1-5 years, renewable
Balance Sheet Presentation
On the balance sheet:
- Drawn amount: Recorded as liability (usually current)
- 'Line of Credit' or 'Bank Overdraft/Revolver' line
- Often under 'Current Debt' or 'Other Current Borrowings'
- Undrawn commitment disclosed in footnotes (off-balance-sheet)
- Long-term revolvers may split current/non-current
Interest accrued separately if material.
Advantages and Uses
- Flexibility for seasonal or unpredictable cash needs
- Cost-effective (pay interest only on used funds)
- Working capital management
- Bridge financing
- Backup liquidity (committed lines)
Analytical Considerations
Lines of credit impact analysis by:
- Providing liquidity cushion (undrawn capacity)
- Increasing short-term debt burden when drawn
- Potential covenant breaches triggering acceleration
- Commitment fees as ongoing cost
- Comparison of drawn vs. total facility for utilization
Heavy reliance on short-term LOCs can signal liquidity risk or rollover concerns.
Key Takeaways
Line of Credit is a revolving borrowing facility with flexible drawdown.
Interest only on outstanding balance; commitment fee on undrawn.
Classified as current liability (drawn amount); undrawn off-balance.
Provides liquidity and working capital flexibility.
Secured/unsecured; committed/uncommitted variants.
Monitor utilization, covenants, and renewal risk for liquidity assessment.
Related Terms
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