Line of credit is a special type of fund based lending services offered to the corporates by the banks to meet short term business or working capital requirements. First, the bank approve a loan limit for a corporate or company based on its credit rating and business and the company (borrower) can take any number of loans within that limit to meets it short term business requirement without applying each time. If the combined loan amount crosses the loan limit set by the bank, then the corporate needs to apply for fresh approval and bank has to complete the full loan approval cycle to approve the same.
The bank charges interest rate on such loans to earn profit for itself. Sometimes a flat fee is used for fixed amount and fixed duration short term credits.
Lines of credit can be secured or unsecured depending on the credit rating of the company and the loan amount. For secured, companies need to offer collateral security like land, fixed assets, receivables etc. to cover up the borrowing while for unsecured, no collateral security is offered. If the company fails to repay the loan, bank may take charge of the collaterals and sell them to recover the money.
Companies use this facility to meet their urgent working capital requirement as it allows the company to pay interest only on the loan amount taken from the bank. The line of credit amount is renewed after certain duration based on the credit condition of the borrower.