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A corporate line of credit is a line of credit that is issued to a business by a financial institution, usually a bank. This line of credit functions in a manner differently from a corporate loan, in that the business can draw on that credit when and as needed, rather than receiving the entire amount at one time. This flexibility in usage allows the business to manage that credit line in a manner that is considered most beneficial for the company, often borrowing against the credit line, paying off the balance, then borrowing again at a later date.
Unlike a corporate loan where the business begins to make set payments on a monthly basis, the establishment of a corporate line of credit does not mean the business must begin using that credit line immediately. Many businesses maintain this type of financial resource as a backup source of revenue to use should it experience a temporary lull in cash flow. For example, a seasonal business may draw upon its open line of credit during the slow period to pay employee salaries or to manage other operational expenses. Once the high season begins, the business then repays the funds drawn from the corporate line of credit, based on the terms and conditions that apply.
Since a corporate line of credit does not have to be exhausted at one time, businesses sometimes use this resource to fund the launch of new products. The credit line can be used to pay for marketing and other promotional costs that help to attract customers and generate demand for that new product. As the returns from sales begin to roll in, those funds can be used to retire the current balance due on the credit line. This strategy helps to strengthen the relationship between the business and the lender as well as restore the full credit line as a financial resource for the company.
One major benefit associated with a corporate line of credit is the way in which interest is applied. Unlike a corporate loan, where the interest is applied to the outstanding balance of the entire loan, interest of a credit line only applies to the current amount of that line that has been drawn by the company. This means that if the business is not currently utilizing the credit line, there is no interest assessed. By adopting a pattern of drawing smaller amounts and paying them off within a short period of time, the company can effectively keep the amount of interest paid low, saving the company money from one year to the next.