Line of credit

A line of credit is a commitment from a lender to pay a company whenever it needs cash, up to a pre-set maximum level.  It is generally secured by company assets, and for that reason bears an interest rate not far above the prime rate.  The bank will typically charge an annual maintenance fee, irrespective of the amount of funds drawn down on the line of credit, on the grounds that it has invested in the completion of paperwork for the loan.  The bank will also likely require an annual audit of key accounts and asset balances to verify that the company’s financial situation is in line with the bank’s assumptions.