bank’s moral commitment to make loans to a company for a specified maximum amount for a given period of time, typically one year. There is usually no commitment fee charged on the unused line. However, a compensating balance requirement often exists.
commitment by a bank to lend funds to a borrower up to a specified amount over a specified future period. Lines of credit are reviewed annually, and do not require fees or compensating balances unless the line is guaranteed by the lender. Bank lines are considered good until further notice and may be withdrawn at the bank’s option. When the borrower is officially notified of the credit available, the line is referred to as an advised line. When the maximum credit is kept internal by the lender, and not disclosed, it is a guidance line. In a commercial line of credit, the borrower is usually required to keep 10% to 20% of the available line in a compensating balance.
agreement whereby a financial institution promises to lend up to a certain amount without the need to file another application. The borrower is expected to reduce the debt after having reached the full amount of credit.
borrowing power that a business firm or an individual has with a lending institution such as a bank.
an agreement whereby a financial institution promises to lend up to a certain amount without the need to file another application.
Example: Happy Homes Brokers, Inc., has a line of credit under which they can borrow up to $50,000 at 3% above the prime rate through The Goodmoney National Bank.