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What is a Credit Line?

A credit line, or line of credit, is the amount of credit extended to a borrower. The amount of credit extended is most often based on the borrower's credit rating. A credit rating, or credit score, is an assessment of a borrower's credit history coupled with their assets and/or liabilities.

Perhaps the most common credit line is the maximum amount a person has on their credit card. The maximum amount that a person may spend on their credit card is the credit line for that credit card.

Lines of credit are also extended to business owners. A credit line in this situation is often used to provide liquidity to the business. This liquidity may be used to expand the business, purchase new inventory, pay off other business debts, or any number of possibilities.

These credit lines may be secured by the business owner’s collateral against the business or they may be unsecured. When the credit is unsecured, the business owner has to personally guarantee that the credit line will be paid. If the credit is not paid, the business owner’s personal assets may be used to pay off the loan. Business owners should be very careful, like homeowners, in knowing all the terms and conditions of their credit line. Misunderstanding the terms and conditions of repayment for a line of credit could be devastating to a growing business.

What is Credit?
What is a Collateral?