What is a Line of Credit and how does it work?

A line of credit is a specific type of loan from a bank or other lending institutions and is offered to companies and corporations. It is a loan facility that is not often made available to individuals. 

We have been asked on a number of occasions what is a “Transfer Line of Credit”? Many think that one company’s line of credit can be used by another company. This is a complete fallacy. Any loan offered by a bank is subject to due diligence on the borrower. A company can only get a line of credit on their own merit. It is NOT transferable.

As a point of interest, a line of credit differs from a standard or straight loan. A standard loan like a line of credit will have an expiry date. A standard loan will have set dates for partial repayment of principal and interest, up to and including the expiry date. The difference to a line of credit is explained in paragraph 2 below.

How does a Line of Credit work?

There are two types of lines of credit, secured and unsecured. Unsecured indicates that the borrower has not put up and security or collateral. Whereas secure lines of credit show the borrower has put up security or collateral to obtain a line of credit.

A Line of Credit will have an credit limit and an expiry date. There will be set dates for partial repayments of principal and interest. Unlike a standard loan the borrower at any time can keep borrowing up to the credit limit.

A company will have to apply to their bankers or lenders for a line of credit. The company in question will have had to have an account with their bank for a number of years. As mentioned above the bank will have to carry out strict due diligence procedures.

Sometimes a company will apply for a straight loan to cover a certain aspect of their business. They may have a shortfall in cash flow and need a loan to cover day to day expenses such as salaries.

However, a more complex loan application will cover different aspects of the business model.

This is where a line of credit can prove extremely useful. The company may need loans for upgrading their factory. They may need loans for letters of credit, as their business relies on imports. 

The company is therefore able to use a line of credit to borrow for all aspects of their business. Importantly, the lender can keep track of each borrowing. The lender can ensure that their loans are being utilised in the correct areas.

How easy is it to get a Line of Credit?

It is a known fact that banks have been cutting their loan books for a number of years. Companies applying for lines of credit are being declined en masse. Some banks have not increased their lending for 13 years. The lack of credit facilities is endemic throughout the world. Please see the following article, you will be stunned,

Do Not Despair

If you are a company who have had their Line of Credit applications rejected do not despair. Here in Geneva, we are fortunate to be one of Europe’s leading experts in Collateral Transfer. Collateral Transfer utilises Demand Bank Guarantees to obtain loans and lines of credit.

IntaCapital Swiss SA, Geneva has been Europe’s leader in the Collateral Transfer market for over a decade, and our highly popular Collateral Transfer Facility has made loans and lines of credit available to numerous companies. To find out more, enquire today.