Credit
A line of credit consists of amounts due to a 3rd party, typically a financial institution, and are documented with a signed agreement between the parties. This is an arrangement that allows the Company to borrow funds as needed, typically up to a certain amount, which is commonly based on accounts receivable and inventory, to finance the working capital needs of the Company. Interest is due monthly on the outstanding borrowings, principal is not usually required to be repaid until the line matures. Typically, a line will have a one or two year term, and will usually be renewed by the financial institution as long as the Company’s finances have not deteriorated significantly. There are usually financial covenants that have to be met on an annual basis in order for the financial institution to keep the line open to the Company:
1. Debt to assets ratio
2. Debt coverage ratio
3. Times interest earned ratio
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