A line of credit is a flexible lending instrument secured by assets.

As an example, you are approved for a ceiling of say $100,000. It allows you to run up a $100,000 "over draft" in your operating or corporate checking account. Then, when you make your bank deposit the line of credit is repaid.

This provides a great deal of flexibility and can be a valuable "buffer" to pay your accounts payable before your receivables come in.

Most often, a line of credit is granted based upon sales volume and your accounts receivables (AR). Each month you report your sales and AR (there may be other reporting required, as well). Based upon the amount of sales and AR the bank calculates a percentage of your AR to determine the amount of your line of credit.

Typically, you will be lent somewhere between 20-30% of your total AR. The older the aging of your AR the less the bank will lend. For example, amounts over 60 days will not likely be included in the calculation.

A line of credit can be secured with other assets as well, but using your AR is the most common. You will also likely be required to sign a personal note or guarantee. This would allow the bank to liquidate your personal assets if your business failed, and the line of credit is not repaid. A personal guarantee should state a specific amount (the amount of the line of credit), but these days you sign an unlimited personal guarantee. You will likely also be required to sign a letter that restricts you borrowing money elsewhere without approval.

Ask lots of questions when talking to your banker, and make sure that you have a good relationship. It can make a world of difference!