Lines of Credit (LOC)

A line of credit (LOC) is a preset borrowing limit that can be tapped into at any time. The borrower can take money out as needed until the limit is reached. As money is repaid, it can be borrowed again in the case of an open line of credit. An LOC is an arrangement between a financial institution—usually a bank—and a customer that establishes the maximum loan amount that the customer can borrow. The borrower can access funds from the LOC at any time as long as they do not exceed the maximum amount (or credit limit) set in the agreement.

All LOCs consist of a set amount of money that can be borrowed as needed, paid back, and borrowed again. The amount of interest, size of payments, and other rules are set by the lender.

Some LOCs allow you to write checks (drafts), while others include a type of credit or debit card. A LOC can be secured (by collateral) or unsecured, with unsecured LOCs typically subject to higher interest rates.

A LOC has built-in flexibility, which is its main advantage. Borrowers can request a certain amount, but they do not have to use it all. Rather, they can tailor their spending from the LOC to their needs and owe interest only on the amount that they draw, not on the entire credit line. In addition, borrowers can adjust their repayment amounts as needed, based on their budget or cash flow. They can repay, for example, the entire outstanding balance all at once or just make the minimum monthly payments.

Considerations

Often the price of a business loan is stated in terms of an interest rate, points and other fees. A point is a fee that equals 1 percent of the loan amount. Points are usually paid to the lender, Business Finance Consultant, or both, at the settlement.

Often, you can pay fewer points in exchange for a higher interest rate or more points for a lower rate. Ask Magnum Enterprise Solutions about points and other fees.