From the course: Foundations of Business Banking

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Lines of credit

Lines of credit

From the course: Foundations of Business Banking

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Lines of credit

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- A company can use a line of credit to be preapproved by a bank to be able to borrow operating funds up to an established credit limit. For example, sometimes a seasonal company, such as a holiday retailer, needs to borrow money in the short term. One way to obtain this financing is just a straightforward short-term bank loan. Go to the bank, ask for a loan, and promise the bank that you will repay the loan in a couple of months. Another way to obtain short-term financing is to arrange all of this in advance by obtaining a line of credit. You go to the bank with a cash needs forecast, and you say, "My business is a seasonal one. "Over the next two years, "I'll be needing short-term cash from time to time. "Let's make the loan arrangements now." If the bank judges your cash budget forecast to be acceptable, and if you can offer good collateral for the loans, such as granting the bank the right to claim your inventory…

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