A commitment from a lender to advance money up to a set limit, which a business can draw, repay and draw again as its cash needs rise and fall.
A line of credit is built for needs that come and go: inventory before a busy season, receivables waiting to be paid, payroll in a slow month. The Federal Reserve’s examination manual says seasonal and working-capital loans are often set up this way and are meant to be repaid as the financed assets turn into cash.
The manual separates two forms. An advised line is a revocable commitment, usually for one year, reviewed by the bank each year, with no fixed repayment schedule. A revolving credit runs for a stated period, usually carries a fee, and gives the lender less control, because it has agreed to make advances within the limits of the loan agreement.
Two features catch borrowers off guard. The first is renewal: most of these facilities run one year, and renewal means a fresh look at your financials. The second is the clean-up period, a stretch of usually 30 days in which the balance must be paid to zero. The manual says this shows the borrower does not depend on the line for permanent financing, and that the requirement is becoming less common.
How it shows up in the data here
A lender's loan balances count only what borrowers have drawn. The unused part of a line is a commitment, not a loan, so a bank with many lightly used lines looks smaller in the business loan books ranking than its commitments would suggest. The data here does not separate lines from term loans. State lists of business lenders are at business lenders.
Go further
- Business lenders by state: Lenders holding business loan balances.
- Business loan books, ranked: The largest business loan balances held.
- Business line of credit package checklist: A line of credit pays for the gap between spending money and collecting it. The lender wants to see that the gap is real, that it closes, and what it can take as collateral while it is open.
- How bankers evaluate a commercial loan deal: A credit officer asks one question five ways: how will this loan be repaid, and what happens if it is not? Knowing the five tests lets you size a request before you send it.
Related terms
- Working capital: The money a business has tied up in day-to-day operations, measured as current assets minus current liabilities; a working capital loan funds that gap.
- Borrowing base: The most a lender will advance on a line of credit at a given time, set as a percentage of the eligible receivables, inventory or other collateral pledged.
- Term loan: A business loan for a set amount with a maturity of more than one year, repaid on a fixed schedule from the company's cash flow.
- Unused commitment: The part of a legally binding promise to lend that the borrower has not drawn yet, such as the open amount on a line of credit or the unfunded balance of a construction loan.
- SBA CAPLines: SBA's 7(a) lines of credit for short-term operating needs, in four types: Working Capital, Contract, Seasonal and Builders. The most for one line is $5,000,000.
- SBA Express loan: A 7(a) loan of $500,000 or less that only a lender with SBA Express authority can make, on its own credit decision, with a 50 percent SBA guaranty.
- Farm operating loan: A short-term loan or line that pays a farm's yearly costs, such as seed, feed, fertilizer and rent, and is repaid when the crop or livestock is sold.
Sources
Plain definitions for orientation, not legal, tax or credit advice. A lender's own policy decides what it will do.