What is a line of credit?

A line of credit is indeed a flexible loan option that allows businesses to borrow funds as needed up to a certain limit. This means that businesses can access funds quickly and only pay interest on the amount they actually borrow, rather than on the entire credit limit available to them. This flexibility makes lines of credit particularly useful for managing cash flow and addressing short-term financing needs.

In contrast, a fixed loan amount, as mentioned in one of the other options, requires businesses to take a lump sum and repay it over a predetermined period, which does not allow for the same flexibility as a line of credit. Equity financing involves raising capital by selling shares of the business, which is fundamentally different from borrowing and repaying funds through a line of credit. Lastly, government grants are funds provided by the government that do not require repayment, again differing from the structure and purpose of a line of credit. Thus, a line of credit provides a unique financial tool that meets specific operational needs for businesses.