Credit Lines and Monetisation
What is a Line of Credit?
A Line of Credit is a pre-set amount of borrowing which can be used at any time and secured against an asset or security. The borrower can take money out within the limit as much as needed. Once the money is repaid, it can then be borrowed again, in the case of an open Line of Credit. This is sometimes referred to as a ‘cheque book’ facility. A Line of Credit has built-in flexibility, which is the main advantage. Whilst an open-end credit facility has the advantage of being flexible, it has the disadvantage of high-interest rates and large penalties for late payments or potential overspend.
What is a Secure Line of Credit?
A secure Line of Credit is guaranteed by a collateral asset of the business, for example through business/company shares or assets. This collateral is monetised in order to facilitate a secure Line of Credit with a bank. Monetisation is the process of converting or establishing an asset into legal tender. If this credit is then unpaid, The lender will take control of the original collateral put forward as security, in this example the company shares or assets, which can then be sold or used to recoup any losses.