A line of credit is a credit facility for a borrower to take advances, during a defined period, up to the preset "line limit” and repay the advances at the borrower's discretion (with the exception that the entire principal balance plus accrued interest is due on a predetermined maturity date - the date when the principal amount becomes due or payable.

For businesses, an operating line of credit is used to provide liquidity during the operating cycle of the business. The level of control is determined by the perceived credit risk and the line limit.  For smaller lines to companies with good credit, there may be no active controls on line of credit usage; that is, the customer can take advances and repay advances at will. Typically, line usage is only analyzed annually, or at renewal.  If the line did not properly "revolve" during the year, the line of credit would generally be converted to a fully amortizing term loan and the line of credit closed out.

For larger lines of credit, and for companies deemed to be a higher credit risk, the line may be more closely monitored.  For a fully controlled line, a borrower would be required to submit a daily accounting of accounts receivable and accounts payable along with a borrowing base certification calculating how much is available on the line and how much of an advance is needed that day. With a fully controlled line, all A/R collections are mailed by the payee directly to a bank lock box and all payments deposited to a bancontrol account not accessible by the borrower. The borrower requests operating funds via the borrowing base certificate process described above. The entire process is further monitored by annual or semi-annual A/R examinations in which the quality of a company's A/R is determined. The loan agreement for a fully controlled line of credit often states what type of receivables are acceptable as collateral (exclusions may include past-due A/R, foreign A/R, concentrations to one customer, etc.), and may specify a period of time when the company is to be "out of debt" as to use of the line. Many other controls are possible. A line of credit may also be used to support an import/export letter of credit often used with international transactions.

An operating line of credit is an important component of a company's finances and many businesses could not survive without this basic banking product.¹

¹ http://en.wikipedia.org/wiki/Line_of_credit

An arrangement in which a bank (e.g. Wells Fargo, Bank of America, Citigroup) or vendor (e.g. Intel, Microsoft) extends a specified amount of unsecured credit to a specified borrower for a specified time period.  In a vendor example such as Intel, Intel will extend lines of credit to a computer manufacturer and will then supply a that manufacturer with components (e.g. processors) against the line of credit with the agreement that the manufacturer will pay for these parts within an agreed time period – typically 30 or 60 days.

A checking account feature available with most bank facilities in which a person has a line of credit to write checks for more than the actual account balance.  Instead of getting charged about $25 for bouncing a check, overdraft protection will in effect provide the account holder with an instant loan.  The interest rate will be extremely high, but if it is paid off quickly it is usually much less expensive than the bounced check fee. Some banks do charge a fee when an account balance falls below zero even if the account holder has overdraft protection, but it's still significantly less than the bounced check fee.

Free Cash Flow™
Using the patented Free Cash Flow credit line system, your firm can finance all of its out-of-pocket expenses on an evergreen line of credit, and have your clients pay the interest.  Using PTFM’s patented methodology, PTFM bills your client a small up-front fee for each out-of-pocket cash expense advanced for the client.  That fee is used to pay the interest on an evergreen line of credit. Your firm merely passes the PTFM fee along to its client with the bill for the disbursement, and enjoys “zero interest” financing of its client costs. Clients prefer the PTFM System over retainers.

Cash Management and Cash Flow Headaches are Eliminated.
Almost every line of credit has a mandatory resting period each year. This often means a law firm has extreme cycles in cash reserves, as early in the year it borrows heavily to fund out-of-pocket expenses and then pays off the line as the year progresses and rests it as required. On the other hand, PTFM’s evergreen line of credit system virtually eliminates your cash flow and cash management headaches. Funding for out-of-pocket is out-of-sight and out-of-mind, quietly working to fund your client costs with no hassles or extra work for your clients or accounting staff.

Firm Finances are Easier to Understand and Manage.
By separating the two lines using the PTFM system, your firm’s actual financial performance is more transparent and therefore easier to follow and manage.

Lines of credit give consumers and corporations short and long term vehicles for debt financing.  Non-revolving lines of credit typically help finance capital intensive projects, but also fund one-off expenses.

• Smoothing the Vicissitudes
• A line a credit enables a consumer to finance “life” with fixed payments over a determined period of time.  This allows for planning and budgeting.