Line of Credit

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Line of Credit
Line of Credit Collateral

Collateral can be used to secure a line of credit much as it can be used to secure a loan. Collateral is something of value that the lender has a right to take possession of if the line of credit is not paid off.

A line of credit is an agreement between a lender and a borrower under which the lender makes a certain amount of credit available to the borrower. Unlike a loan the borrower decides how much of the money they can use.

Another difference between a line of credit and a loan is that the line of credit remains open after it has been paid off. The borrower can use it again and again as long as the balance is paid off.

As with a loan interest is charged on a line of credit. The interest is how the lender makes its money off of this arrangement.

When collateral is used with a line of credit the amount of credit available is a percentage of the value of the collateral. This percentage is always lower than the value so the lender can make some money off the line of credit.

Types of Line of Credit Collateral

There are many different kinds of collateral that can be used to secure lines of credit. To get a line of credit, the borrower will have to have complete ownership of the collateral in most cases.

The most common kind of collateral used for lines of credit is real estate equity. Home equity lines of credit are based on real estate equity. Equity is the difference between the value of a property and the amount it is mortgaged for. If the value of the property exceeds the mortgage, the owner has equity available.

Private equity lenders give lines of credit in which inventory, equipment and other items in possession of a business are used as collateral. Some equity lenders will even let a borrower use intellectual property rights such as patents or copyrights as collateral for a line of credit.

Accounts receivable lenders let businesses use unpaid customer invoices as collateral for a line of credit. In this line of the credit the lender gets the right to collect on the invoices if they are not paid.

Factors and inventory lenders will make lines of credit available on a business’s unsold inventory. These lenders may take physical possession of the inventory until the line of credit is paid. If the line of credit is unpaid the lender keeps the inventory.

Pawnbrokers may extend lines of credit to businesses and individuals. As with any pawn transaction the pawnbroker will hold the collateral until the line of credit is paid off.

How Do You Know You Have Collateral

To be line of credit collateral an item will have to have enough value to interest a lender. Generally, lenders won’t extend a line of credit unless the item can be sold for at least a few thousand dollars.  Not all lenders will take every item as collateral and many lenders specialize in one kind of collateral.

The lender will probably want to physically inspect the collateral before it issues a line of credit. This can delay the line of credit.