Bank Line

A line of credit from a bank or financial institution

What is a bank line?

A “bank line” or a “Line of Credit” (LOC) is a kind of loan that is readily extended to an individual, corporation or government by a bank or other financial institution. This type of credit is different from usual loans, such as, housing mortgages and car loans applied for by borrowers. Usually, the borrowers of an LOC can access the funds at any time as long as the agreed credit limit is not exceeded and timely minimum payments are diligently followed. This is also a type of revolving account, wherein the borrower can access the money, spend it, repay it and spend it again. The bank or financial lender will charge interest as soon as money is borrowed. Bank approval for this type of credit depends on the borrower’s credit history, credit rating, and business relationship.

 

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What are the types of Bank Line?

Unsecured LOC – there is no collateral backing the loan, but a borrower must establish a good credit rating and status to qualify. Small businesses with proven positive credit histories are more likely to get approved, but the amount extended still depends on various factors, such as: revenue, expenses, established credit, and years in business.

Secured LOC – property or equity in a property will serve as the collateral for this LOC. In case of default in the loan payment, the lender has the ability to recover the money when the property is sold.

Home Equity (HELOC) – used for large purchases, such as, home improvements and vehicles. The amount of funds that can be borrowed under an HELOC is based on a percentage of the appraised value less the amount still owed. There is a draw term by which the fund can only be taken during a set period of time.

Business LOC – extended to clients who operate a business. Collateral is not often required, but banks are stringent on qualifications – some financial institutions accept inventory and accounts receivable to back-up the LOC.

Personal LOC – extended to individuals who can draw funds anytime, as long as the credit limit is not exceeded. In contrast to a credit card, this personal line of credit has a lower interest rate, no grace period or reward for early payment, no charge for cash advances, and the balance is transferable between accounts.

 

What is the Purpose of a bank line?

In terms of flexibility and security, a bank line of credit can be helpful for businesses as well as for individuals who are in urgent need of ready cash.  One of the most typical uses of having a line of credit in a financial institution is for working capital. Funds are readily extended to business borrowers for settling obligations while their receivables are still pending collection or waiting to clear. LOCs are often renewable on an annual basis and require accounts receivable, aging on a regular basis.

 

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What situations are a bank line useful?

  • Events or projects with funding challenges, such as weddings, funerals, birthdays, etc.
  • Individuals who are self-employed or work on a commission who urgently need cash as the next paycheck is not yet available.
  • Emergency situations, such as taxes, bill payments, health issues, school tuition, etc.
  • Overdraft protection for check users who are often in short supply of cash to fund their drawn checks.
  • Buying or investing in business opportunities or those who may need to promote their businesses through advertising, marketing or tradeshow participation.

 

More learning

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