What Is a Bank Line of Credit?

A bank line of credit can cover short-term expenses.

A bank line of credit is a pool of money your business can borrow from to cover short-term expenses. Credit is generally extended for one year, allowing you to borrow any amount up to the maximum whenever you choose.

Confirmed Line of Credit

With this type of credit, your bank will set terms and conditions up front in the form of a legal binding contract.

Guidance Line of Credit

There is no legal binding contract with this type of credit line. Conditions are more loosely set by the lender, allowing flexibility for adjusting terms later.

Cost Savings

Credit is extended to your business with no lending fees collected by the bank.

Flexibility

You can tap into your bank line of credit at anytime, making this type of credit beneficial if your business is prone to irregular or seasonal income. Renewing your line of credit is simple if you continue to meet conditions set forth by the lender.

Securing a Line of Credit

Approach your current bank first with proof your business has a sound financial track record, and has been turning a profit for more than two years. You will have to keep what is referred to as a compensating balance in your account; normally this amount is 10 percent of the total credit line, plus 10 percent of the sum being borrowed.

References

• Gaebler: Bank Credit Lines
• Business Week: Small Business Lines of Credit: Face Your Fears

Resources

• The CPA Journal: The Benefits of a Line of Credit with the Right Bank