line of credit
line of credit: A business line of credit is a flexible financing arrangement where a lender approves a maximum borrowing limit, allowing a company to draw, repay, and redraw funds as needed, with interest charged only on the amount utilized.
Plain-English Explanation
Think of a business line of credit as a reusable pool of money. Instead of receiving a lump sum that must be paid back on a fixed schedule, your business can access cash whenever cash flow is tight. You only pay interest on the portion you actually use, and as you repay, that borrowing capacity becomes available again for future needs.
Why It Matters
This structure provides critical flexibility for managing uneven cash flow, such as seasonal revenue dips or timing gaps between paying suppliers and receiving customer payments. It allows leadership to address immediate operational expenses without committing to long-term debt or rigid monthly payments associated with term loans.
Next Step
Review your current cash conversion cycle to identify timing gaps where flexible borrowing could prevent operational delays, then prepare facility limit requirements for professional review.
Examples
- A manufacturing company secures a $100,000 line of credit. In January, they draw $20,000 to purchase raw materials. They repay $10,000 in February and $15,000 in March. The available credit limit resets to $95,000, ready for use in April when inventory buildup requires additional working capital.