As companies, we can use lines of credit as a useful and accessible financing tool when we need liquidity in the short term. And like any activity, it must be correctly recorded in the company's accounting. If we are an SME, the accounting treatment of a line of credit can be a challenge if we have never used this financing method before. But we do not have to worry, the accounting entries that we must use to make a good accounting entry of the lines of credit are really simple to do.
But what is a line of credit and why are they used? A line of credit is a current account that we can open in any financial institution to obtain liquidity for our short-term C Level Executive List operations. In other words, it is an account that the bank offers us to borrow —in a similar way to a loan— up to a limit set by contract and that we agree to pay interest and commissions within the time period established in it. Credit lines are always short-term, with a duration ranging from 6 months to 2 years.
Being possible to renew them once the expiration of the granted line has arrived. What are the advantages of lines of credit? The main benefit for companies of lines of credit is that it provides the liquidity you need, without committing yourself in the same way you would with a loan. For practical purposes, lines of credit act as loans, but with the difference that most of the interest is paid on the amount of money used , and not on the total capital available for use by the company. In this way, if we do not use the entire credit line granted, the interest will be lower.