A line of credit is a revolving loan. A business that wants ready access to cash can set up, say, a $4 million line of credit backed by company assets. If the company borrows $4 million, then pays it off, it can borrow against the line of credit again instead of taking out another loan. If the company taps the line of credit, the loan goes onto the balance sheet.
Lines Are Liabilities
The balance sheet is an equation. One side shows the company's assets, and the other shows the liabilities and the owners' equity. If the company uses its line of credit to borrow, say, $2 million, the debt goes down as a current liability. It's current because lines of credit usually get paid back within a year. If it keeps some of the $2 million on hand, that money goes down as an asset.
- Journal of Accountancy: Asset-Based Financing Basics
- Credit Management World: Balance Sheet
- Consumer Financial Protection Bureau. "Differentiating Between Secured and Unsecured Loans." Accessed May 11, 2020.
- Nolo. "What Can Creditors Do If You Don't Pay?" Accessed May 11, 2020.
- Federal Trade Commission. "Home Equity Loans and Credit Lines." Accessed May 11, 2020.
A graduate of Oberlin College, Fraser Sherman began writing in 1981. Since then he's researched and written newspaper and magazine stories on city government, court cases, business, real estate and finance, the uses of new technologies and film history. Sherman has worked for more than a decade as a newspaper reporter, and his magazine articles have been published in "Newsweek," "Air & Space," "Backpacker" and "Boys' Life." Sherman is also the author of three film reference books, with a fourth currently under way.