Line of credit

What is a line of credit?

A line of credit (LOC) is a form of short-term credit extended by a bank to a business. It allows the company to withdraw money up to a pre-agreed limit, usually based on the company’s creditworthiness. It is intended as temporary financial support to solve temporary liquidity problems, for example, or to cope with seasonal fluctuations in cash flow. The interest rate on a line of credit is often higher than other forms of financing, as the risk to the bank is higher due to the variable conditions and flexibility of the loan. The credit limit can be revised periodically, and the company has to pay interest on the amount drawn.