The definition of a line of credit is an arrangement in which a bank or vendor lends an agreed upon amount of unsecured credit to a borrower for a certain time period. It's also known as a credit line.
Businesses use a line of credit to provide liquidity for their financial needs. The limit on this line is determined by the lenders assessment of the amount of risk in lending money to the business. For small businesses with good credit there may be no active control in their lines of credit. So the borrower can borrow and payback the lender at wwill. The typical line of credit is analyzed once a year. If the line of credit was not properly paid back within the year, than the line of credit is typically converted into a loan.
Lines of credit for larger sums of money are typically monitored more closely. Fully controlled lines are analyzed daily, with accounts payable, accounts receivable, and advanced notice of how much credit is needed. These lines of credit can be fully controlled by the bank, with all payments made directly from the bank to a fund that the borrower has no direct access to. The borrower can make an official request of funds from the bank. The business will then have further review every year to examine their line of credit.
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