What is a line of credit? Mainly it is to have the possibility of borrowing up to a certain limit, but without being obliged to do so. We simply have that credit facility.
Unlike a normal loan or credit, this option is much more flexible, since once approved, we can have the credit and return it as we see fit, without there being any deadlines, fees and repayment schedules scheduled.
It is especially convenient to finance short-term current expenses
Or what is known as current, not medium and long-term investments, since in that case there are other more suitable products.
It can be implemented in several ways:
- Bank account with an authorized credit limit. Operationally similar to having an authorized overdraft, it is the most extended option. A small interest is paid for the amount not provided. It is the most frequent.
- Credit for provisions. We have an approved limit, and we are making provisions until we reach that maximum risk, which is credited to our checking account.
What is the purpose of having a line of credit and not a loan?
Basically, it is about solving specific needs of money, both for individuals and especially companies. For example, we are a company and we pay suppliers to manufacture our products on the 20th of each month, and our client pays us every day of the month. In that case, we have a need for those 10 days, but it may be that the rest of the month we are over money. So, why pay interest for 30 days of the month if we only need 10?
In the case of individuals, it would be similar: if we charge on the 25th of the month, it is possible that when there are few days left we will run out of money and need financing to cover that specific need. Some individuals mistakenly use revolving cards for that purpose, not being a product designed for it.
A line of credit is a facility to borrow with a maximum limit and with total flexibility, and is designed to cover specific liquidity needs, not to have a structural debt that is eternalized, since for that it is better to apply for a long-term loan, for which we will pay much lower interest.