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Working Capital Line of Credit

A revolving line of credit works well to meet short-term liquidity needs of business. It is typically used for ongoing working capital or other cash needs of a company, such as inventory purchases and payroll. It also allows organizations to offer short-term credit to customers, and to cover periodic or cyclical business fluctuations.

An established business with a sound credit history may be able to obtain an unsecured revolving line of credit, but the credit limit is usually low. For businesses needing more, the line is usually secured with accounts receivable, inventory, machinery and equipment, and real estate (in some cases). Typically, the business owner is also required to sign a personal guaranty.

The interest rate usually floats and is based on the Prime rate plus a spread. The lines are typically renewable annually, but terms ranging from 90 days to several years are available. Longer terms are usually subject to annual reviews by the lender.

The bank sets a credit limit, the maximum amount of funds available from the line. The borrower can draw on the line only when, and for, the amount it needs.

The bank may assess a commitment fee for making a line of credit available to the borrower.

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