Definition & Meaning:

For many businesses there is often a delay between when they sell something and when they are paid for it by the customer. This delay can lead to a shortfall in cash (i.e. they don't have enough money to pay for things until they receive the money from the customer). Which means they regularly have to borrow some money from a bank for a very short period of time.

But how can they borrow this money? Do they have to get a bank loan each time?

Banks are aware that this temporary shortfall of cash happens regularly to many businesses, so have a type of account which allows them to instantly borrow money when they need to. This account is called a 'line of credit'.

In many ways a 'line of credit' it is the same as a 'credit card'. There's a maximum limit to how much the business can borrow and the it's up to the business how much of the money available in the 'line of credit' they can use. But unlike a credit card account, only businesses or companies can have one.

A similar way that a company (or a person) can borrow money from a bank without getting a loan is with an 'overdraft'.

Related Vocabulary:


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