A revolving line of credit (LOC) is a loan arrangement where the debtor can borrow and repay the debt at the borrower’s discretion. Funds borrowed from the LOC can be used, repaid, and reborrowed in different amounts and at different times.
The bank extends a line of credit with a maximum amount that can be borrowed and a fixed or variable interest rate.
Example LOC Arrangement
Company ABC, a Delaware corporation, opens a revolving line of credit with its bank for $1,000,000 and an 8% interest rate.
On June 1, 2023, the company borrowed $105,000 from the LOC to use as working capital. The bank charged interest expense of $700 on July 1, 2023. The company paid $5,000 on July 2, 2023, to reduce the open balance to $100,700.
The company can continue to borrow funds in amounts of its choosing, repay the debt as necessary, and keep the LOC open because it has no expiration date.