A line of credit
is any credit
Credit is the trust which allows one party to provide resources to another party where that second party does not reimburse the first party immediately , but instead arranges either to repay or return those resources at a later date. The resources provided may be financial Credit is the trust...
source extended to a government, business or individual
Personal finance is the application of the principles of finance to the monetary decisions of an individual or family unit. It addresses the ways in which individuals or families obtain, budget, save, and spend monetary resources over time, taking into account various financial risks and future...
by a bank
A bank is a financial institution that serves as a financial intermediary. The term "bank" may refer to one of several related types of entities:...
or other financial institution
In financial economics, a financial institution is an institution that provides financial services for its clients or members. Probably the most important financial service provided by financial institutions is acting as financial intermediaries...
. A line of credit may take several forms, such as overdraft
An overdraft occurs when money is withdrawn from a bank account and the available balance goes below zero. In this situation the account is said to be "overdrawn". If there is a prior agreement with the account provider for an overdraft, and the amount overdrawn is within the authorized overdraft...
protection, demand loan
A loan is a type of debt. Like all debt instruments, a loan entails the redistribution of financial assets over time, between the lender and the borrower....
, special purpose, export
The term export is derived from the conceptual meaning as to ship the goods and services out of the port of a country. The seller of such goods and services is referred to as an "exporter" who is based in the country of export whereas the overseas based buyer is referred to as an "importer"...
packing credit, term loan, discounting, purchase of commercial bills, etc. It is effectively a bank account that can readily be tapped at the borrower's discretion. Interest
Interest is a fee paid by a borrower of assets to the owner as a form of compensation for the use of the assets. It is most commonly the price paid for the use of borrowed money, or money earned by deposited funds....
is paid only on money actually withdrawn, although the borrower may be required to pay an unused line fee, often an annualized percentage fee on the money not withdrawn. Lines of credit can be secured by collateral
In lending agreements, collateral is a borrower's pledge of specific property to a lender, to secure repayment of a loan.The collateral serves as protection for a lender against a borrower's default - that is, any borrower failing to pay the principal and interest under the terms of a loan obligation...
Lines of credit are often extended by banks, financial institutions and other licensed consumer lenders to creditworthy customers (though certain special purpose lines of credit
may not have creditworthiness requirements) to address liquidity problems; such a line of credit is often called a personal line of credit
. The term is also used to mean the credit limit
A credit limit is the maximum amount of credit that a financial institution or other lender will extend to a debtor for a particular line of credit...
of a customer, that is, the maximum amount of credit a customer is allowed.
A cash credit is a short-term cash loan to a company. A bank provides this type of funding, but only after the required security is given to secure the loan. Once a security for repayment has been given, the business that receives the loan can continuously draw from the bank up to a certain specified amount.
Cash Credit in India
In India, banks offer Cash Credit accounts to businesses to finance their ' Working Capital
' requirements [ requirements to buy raw materials or ' Current Assets ' , as opposed to machinery or buildings , which would be called ' Fixed Assets ' ] . The cash credit account is similar to current accounts as it is a running account [ ie. payable on demand ] with cheque book facility. But unlike ordinary current accounts , which are supposed to be overdrawn only occasionally, the cash credit account is supposed to be overdrawn almost continously. The extent of overdrawing is limited to the Cash Credit Limit
that is sanctioned by the bank. This sanction is based on an assessment of the maximum working capital requirement of the organisation less the margin . The organisation finances the margin amount from its own funds.
Generally, Cash Credit account is secured by a charge on the Current assets [ inventory ] of the organisation. The kind of charge created can be either Pledge or Hypothecation. http://www.indiainbusiness.nic.in/investment/funding_option.htm
Special purpose line of credit
A relatively recent credit product has arisen due to economic trends and the impact the economy has had on individuals in general, but specifically for disadvantaged individuals due to special circumstances, affiliations, gender, or external bias. Lenders of many types have explored providing targeted services to select groups. However, most successful attempts have been done by consumer lending entities (licensed and unlicensed) that are generally filling a niche credit service abandoned by the traditional providers. These are credit services that, based on one or more pre-defined criteria, may qualify a borrower for their credit services.
- Home equity line of credit
- Signature line
A signature line of credit is a revolving line of credit that is not backed by collateral; i.e., the sole criterion for the decision to grant the loan and establish the terms thereof is an assessment of the customer's credit rating. Also known as an "unsecured line of credit".-See Also:*...
- Unsecured debt
In finance, unsecured debt refers to any type of debt or general obligation that is not collateralised by a lien on specific assets of the borrower in the case of a bankruptcy or liquidation or failure to meet the terms for repayment....